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A pension plan is obligated to make disbursements of $1 million, $2 million, and $1 million at the end of each of the next three years, respectively. The annual interest rate is 10%. If the plan wants to fully fund and immunize its position, how much of its portfolio should it allocate to one-year zero-coupon bonds and perpetuities, respectively, if these are the only two assets funding the plan? (DO NOT ROUND INTERMEDIATE CALCULATIONS. ROUND YOUR ANSWERS TO 2 DECIMAL PLACES.)
Investment in one-year zero-coupon bonds = ? (%)
Investment in perpetuity = ? (%)
Lucinda has a mortgage loan with an interest rate of 3.9% APR, compounded monthly for 30 years. Her taxes and insurance are $375 per month. Lucinda has an estimate for a contract for $8,500 firm, fixed price to remodel the house and this expense will..
General Hospital, a not-for-profit acute care facility, has the following cost structure for its inpatient services:
Financial ratio analysis is conducted by managers, equity investors, long-term creditors, and short-term creditors. What is the primary emphasis of each of these groups in evaluating ratios?
You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $490 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2;..
A bond sells for $983.60 and has a coupon rate of 6.90 percent. If the bond has 29 years until maturity, what is the yield to maturity of the bond?
Duval Inc. uses only equity capital, and it has two equally-sized divisions. Division A's cost of capital is 10.0%, Division B's cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division A's projects are equally risky, as are all of..
The price of a product is $32 per unit. A firm can produce this good with variable costs of 20 per unit and total fixed costs of $10,000. What is the break even level of output? What is the break even level of output if fixed costs increase to $18,00..
Tim Brown of Omega Drycleaners is planning to invest in a new dry cleaning machine worth $80,000. The life of the machine is estimated to be 12 years and at the end of this period the manufacturer will pay $10,000 for the old machine. The incremental..
Describe a method for testing whether interest rate parity exists. Why are transaction costs, currency restrictions, and differential tax laws importan
Pet Food Company bonds pay an annual coupon rate of 7.92 percent. Coupon payments are paid semiannually. Bonds have 14 years to maturity and par value of $1,000. Compute the value of Pet Food Company bonds if the market interest rate on this type of ..
Modigliani and Miller assumed that firms pay out all of their earnings as dividends. Therefore, they theorized that firms do not grow. Firms do grow, however, and as capital structure theory advanced, an extension to the MM model with taxes was devel..
A company has 2 million shares outstanding. It paid a dividend of $2 during the past year, and expects that dividends will grow at 6 percent annually in the future. Stockholders require a rate of return of 13 percent. What would you expect the price ..
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