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Ajax currently has 20% debt and 80% equity. Their weighted average cost of capital is 12%, and the cost of debt is 4%. The tax rate is 40%. The firm is considering a new project. The initial investment is $150,000,000, and the project will generate sales of $80M per year for 8 years. The investment can be depreciated straight-line for 8 years to a zero book value. There are no working capital requirements. Operating expenses (not including depreciation or interest) are $42M per year for 8 years. They plan to fund the project using the proportions listed above and the debt's maturity will match the life of the project. Find the value of the project using FTE (Flow to Equity).
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Sales are expected to increase by 6.5 percent next year. If all assets, short-term liabilities, and costs vary directly with sales, answer the following questions.
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Methods of using stocks and options to create a risk-free hedge portfolio can be created. Support your answer with examples of these methods being used to create a risk-free hedge portfolio.
Show that the probability that there is actually oil in a promising area is 0.73, and 0.45 for the not promising area. If you fail in this step, continue on and use these figures for the parts (ii) and (iii).
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ABC Corp. entered in a currency swap with its bank, providing that ABC borrows $5 million at 10% and swaps for a 12% yen loan.
Assume that you have $100,000 invested in a stock whose beta is .85, $200,000 invested in a stock whose beta is 1.05, and $300,000 invested in a stock whose beta is 1.25. What is the beta of your portfolio?
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Northeast Airlines (NA) has a current dividend of $1.80. Dividends are expected to grow at a rate of 7 percent a year into the foreseeable future. What is NA's cost of external equity if its stock can be sold to net $46 a share?
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