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Answer the following.
(a) Briefly explain the intuition of the empty creditor problem.
(b) Define strategic default and liquidity default.
(c) Discuss how the control rights in default and the insurance in a CDS reduce the likelihood of strategic default.
Assume that the firm's gain from leverage according to the Miller model is $126,667. If the effective personal tax rate on stock income is TS = 20%, what is the implied personal tax rate on debt income? If the following is true:
As a financial advisor, you are assigned a new client who is considering investing in one of two stocks, A or B. The table below shows information about the performance of stocks A and B last year. Based on these factors, what stock would you recomme..
If you are temporarily bearish on the stock market, how many contracts should you sell to fully eliminate your exposure over the next six months?
Your firm is considering leasing a new radiographic device. The lease lasts for three years. The lease calls for four payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be stra..
List and critically discuss the general approaches to pricing.
The following information is for a collateralized mortgage obligation (CMO).
Your broker has quoted a stock you are interested in at 8 1/2. He says that the B of D just announced a dividend of 15.2% on the C.S. (par value $.955), and that the company has been growing at a rate of 4.89% for the past 10 years. As long as you ma..
Which of the following is the only risk that is relevant to a rational, diversified investor?
determine AFW's share price assuming an equity cost of capital of 11.4%.
Stock A has a beta of .2, and investors expect it to return 8%. Stock B has a beta of 1.8, and investors expect it to return 12%. Use the CAPM to find the expected rate of return and the market risk premium on the market
Suppose that the assets of a firm follow a two-state binomial model and are currently market valued at 100mil.
Compute the current price of the bonds if the present yield to maturity is.
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