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1. Endowment at WestMount University decreased by $1 billion following a meltdown in the stock market. Prior to the stock market losses, the University had a balanced budget. Now, the University does not hope that the market will recover. Assuming that the University will remain open and that long-term interest rate (expected rate of return on the endowment) remains at 4%, by how much should WestMount University lower annual spending to balance its books?
2. Your pension will pay approximately £6,000 a year[1]. British government 20-year bonds yield 2.60%[2]. You are offered a lump sum in return for a waiver on annual payments. How much should you ask for?
3. At your daughter's 6th birthday party she tells you that she wants to go to Princeton. It will cost you $30,000 per year for her to attend this four year program. You start putting money into an account that pays 14% annually. You will begin to make deposits on her next birthday and continue this practice until her 17th birthday. She starts college on her 18th birthday*. The second is payable on her 19th birthday and so on. How large are the annual deposits you make to this account?
* first tuition payment
Which of the following risk-free, zero-coupon bonds could be bought for the lowest price?
Rierson owns a garment factory in Spain and sells designer clothes to US and other European countries. He is trying attract some investments from US that he can use to expand further into the US market. He decides to invest into ten year 1,000 EURO G..
You purchased one EAW, Inc. 6 percent coupon bond one year ago for $1,020. The bond makes annual payments and matures four years from now. You sell the bond today when the required return is 5 percent. The inflation rate was 2.8 percent over the past..
We will derive a two-state put option value in this problem. Data: S0 = 290; X = 300; 1 + r = 1.1. The two possibilities for ST are 330 and 180. a. The range of S is 150 while that of P is 120 across the two states. What is the hedge ratio of the put..
Round Table Rental Yards provides construction equipment, trailers, crutches, etc., on short-term rentals. Historically, Art, the owner, has purchased the items that he rents out, but his business has been expanding so rapidly that he is considering ..
Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets of $355,000. The debt-to-total-assets ratio was 17%, the interest rate on the debt was 7.5%, and the firm's tax rate was 35%. The new CFO wants to see how t..
Bond value and time: Constant required returns Pecos Manufacturing has just issued a 15-year, 12% coupon interest rate, $1,000-par bond that pays interest annually. The required return is currently 14%, and the company is certain it will remain at 14..
The last dividend paid by Klein Company was $1.00. Klein's growth rate is expected to be a constant 5 percent for 2 years, after which dividends are expected to grow at a rate of 10 percent forever. Klein's required rate of return on equity (rs) is 1..
Consider the following capital market: a risk-free asset yielding 0.75% per year and a mutual fund consisting of 70% stocks and 30% bonds. The expected return on stocks is 10.75% per year and the expected return on bonds is 3.25% per year. The standa..
Assume the company uses variable costing: Compute the unit product cost for year 1 and year 2. Assume the company uses absorption costing: Prepare an income statement for year 1 and year 2. Reconcile the difference between variable costing and absorp..
Stock Y has a beta of 1.01 and an expected return of 8.38 percent. Stock Z has a beta of .70 and an expected return of 7 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?
blades plc is a u.k.-based company that has been incorporated in the united kingdom for three years. blades are a
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