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A bank offers your firm a revolving credit arrangement for up to $86 million at an interest rate of 2.15 percent per quarter. The bank also requires you to maintain a compensating balance of 2 percent against the unused portion of the credit line, to be deposited in a non-interest-bearing account. Assume you have a short-term investment account at the bank that pays 1.50 percent per quarter, and assume that the bank uses compound interest on its revolving credit loans. a. What is your effective annual interest rate (an opportunity cost) on the revolving credit arrangement if your firm does not use it during the year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Effective annual interest rate % b. What is your effective annual interest rate on the lending arrangement if you borrow $50 million immediately and repay it in one year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Effective annual interest rate % c. What is your effective annual interest rate if you borrow $86 million immediately and repay it in one year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Effective annual interest rate %
One position expressed in the financial literature is that firms set their dividends as a residual after using income to support new investments. A. Explain what a residual policy implies (assuming that all distributions are in the form of dividends)..
Peabody Energy plans to issue a convertible bond in the near future. The bond will pay a $1,000 maturity value in exactly 30 years. The coupon rate will be 1 percent (with a semiannual coupon, of course). The TRACE reporting system is a reliable sour..
Two firms are ordered by the federal government to reduce their pollution levels. Firm A’s marginal costs associated with pollution reduction is MC = 150 + 3Q. Firm B’s marginal costs associated with pollution reduction is MC = 10 + 9Q. The marginal ..
If the Fed sells $2 million of bonds to the First National Bank, what happens to reserves and the monetary base? Use T-accounts to explain your answer.
A 30-year loan of $1000 is repaid with payments at the end of each year. Each of the first ten payments is $80. Each of the next ten payments equals 80% of the amount of interest due. Each of the last ten payments equals the amount of interest due pl..
Stock Y has a beta of 1.3 and an expected return of 18.5%. Stock Z has a beta of 0.70 and an expected return of 12.1%. If the risk-free rate is 8% and the market risk premium is 7.5%, are these stocks correctly priced? If not, what would the risk-fre..
Describe the Static Trade-Off Theory that resulted from a synthesis of the work of M&M and their critics,
The maximum rate that power can be injected or withdrawn from the battery is 20 kWh per period. Star has forecasted LMP’s for the next 10 periods:
Suppose NCM's stock price rises from ¥1,550 to ¥1,650 per share. If the exchange rate does not change, what will happen to NCM's ADR price?
Everything else held constant, if the tax-exempt status of municipal bonds were eliminated, then
Bond A has a 5% annual coupon, matures in 3 years and has a $1,000 face value. Bond B has a 6% annual coupon, matures in 3 years and has a $1,000 face value. Calculate the price of each of the three bonds and indicate whether each bond is trading at ..
The RBA Board considers whether to change ‘the cash rate’ on the first Tuesday of every month, except January. What is ‘the cash rate’? Who is lending to whom, and for how long? What is the RBA’s target for consumer price inflation?
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