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You are considering two potential investments. One is an established company with a history of consistent earnings growth, while the other is a new IPO with a short track record. You think that the stock of both companies will be worth $100 in three years. How would a risk-averse investor differ in his or her value calculations for each of the investments?
What are the main differences between fixed and Variable annuities? Which type is more appropriate for someone who is 60 years old and close to retirement?
The real risk-free rate is 2%. Inflation is expected to be 3% this year, 5% next year, and then 6% thereafter. The maturity risk premium is estimated to be 0.0004 x (t - 1), where t = number of years to maturity. What is the nominal interest rate on ..
Newman manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just completed, Grips earned $3.84 per share and paid cash dividends of $2.14 per share (D0= $2.14). Grips' earnings and dividends are expected to grow at..
You analyzed the returns of a sample of stocks. You found that, on average, the firms with high E/P ratios have higher subsequent returns. (i) Discuss an explanation for this pattern that is consistent with the EMH. (ii) Discuss an explanation that i..
Your firm needs a machine which costs $290,000, and requires $44,000 in maintenance for each year of its 5 year life. After 3 years, this machine will be replaced. The machine falls into the MACRS 5-year class life category. Assume a tax rate of 30% ..
You purchase a bond with an invoice price of $1,040. The bond has a coupon rate of 7%, semiannual coupons, and there are 4 months to the next coupon date. What is the clean price of the bond?
BioMax Inc. offers a 10 percent coupon bond that has a $1,000 par value, semiannual coupon payments and 20 years of its original 25 years left to maturity. Which of the following statements is true if the market return on similar bonds is 8.5%?
Mariano Manufacturing can issue a 25-year, 7.85% annual payment bond at par. Its investment bankers also stated that the company can sell an issue of annual payment preferred stock to corporate investors who are in the 40% tax bracket. The corporate ..
A portfolio of derivatives on a stock has a delta of 2400 and a gamma of –100. An option on the stock with a delta of 0.6 and a gamma of 0.04 can be traded. What position in the option creates a portfolio that is gamma neutral? Give size of position ..
According to the general dividend valuation model, a firm that reinvests all its earnings and pays no cash dividends can still have a common stock value greater than zero. How is this possible?
Jiminy’s Cricket Farm issued a bond with 15 years to maturity and a semiannual coupon rate of 10 percent 4 years ago. The bond currently sells for 91 percent of its face value. The company’s tax rate is 38 percent. What is the company’s total book va..
Suppose the exchange rate is $1.547 per euro. If the dollar depreciates by 11% against the dollar, how many Euros would a dollar buy tomorrow?
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