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You have received two job offers. Firm A offers to pay you $84,000 per year for two years. Firm B offers to pay you $87,000 for two years. Both jobs are equivalent. Suppose that firm A's contract is certain, but that firm B has a 50% chance of going bankrupt at the end of the year. In that event, it will cancel your contract and pay you the lowest amount possible for you not to quit. If you did? quit, you expect you could find a new job paying $84,000 per? year, but you would be unemployed for 3 months while you search for it. Asume full year's payment at the beginning of each year.
a. Say you took the job at firm B, what is the least firm B can pay you next year in order to match what you would earn if you quit?
b. Given your answer to part (a),and assuming your cost of capital is 5%, which offer pays you a higher present value of your expected wage?
c. Based on this example, discuss one reason why firms with a higher risk of bankruptcy may need to offer higher wages to attract employees.
Based on the current spot price, what should be the futures price?
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The Firm, Inc. has an after- tax cost of capital of 12%, and its tax rate is 40%. Last year the firm had $3,400,000 of earnings before interest and taxes on its $12,000,000 of sales, while depreciation expense was $800,000, and interest expense $200,..
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Rocky Mountain Lumber Company is considering purchasing a new wood saw that costs $50,000. The saw will generate revenues of $100,000 per year for four years. Rocky Mountain’s tax rate is 34 percent, and its opportunity cost of capital is 10 percent..
Mr. Hillbrandt has learned a lot about the financial side of running the business during the first year with the company and is now contemplating making changes to the corporate capital structure. He needs your assistance one more time.
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