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Assume CAPM holds and you have the following information regarding three investment opportunities:
Project 1 has a project beta of 2.0 and you have estimated that the project’s NPV using a cost of capital of 20% equals zero. Project 2 has a project beta of 1.5 and its NPV using a cost of capital of 10% equals zero. Lastly, project 3 has a project beta of 1.0 and its NPV equals zero using a cost of capital of 6%. None of these projects are ‘scale-enhancing’ for the firm, i.e. they are different than the regular operations the firm currently maintains. As the head of the capital budgeting department you are trying to decide which projects should be accepted. The company has a levered equity beta of 0.8 and a debt-to-equity ratio of 0.5, which the company is planning to maintain for the foreseeable future. The company currently faces a 40% tax rate. Given that the expected return on the market portfolio is 8% and the risk-free rate is 3%, which projects would you accept and why? (Assume there is no capital rationing and the projects are going to be financed with 100% equity.)
The cash manager of Verematic, Inc., is contemplating the choice between using a wire transfer and an EDT. He estimates that his investment opportunity rate is 9%. The bank's ECR is currently 4%, and the reserve requirement is 12%. Calculate the mini..
What is your PAYOFF? Show it algebraically as well as geometrically.- What is your profit/loss, P/L? Show it algebraically as well as geometrically.
If you require an 13.10 percent return on your investment, how much will you pay for the company's stock today?
In light of the Enron, Worldcom, option back dating, government bailouts/nationalizations and Madoff scandals, do you think U.S. equity markets are cleaner and more reliable than stock markets in the rest of the world?
Crosby Industries has a debt-equity ratio of 1.5. Its WACC is 11 percent, and its cost of debt is 8 percent. There is no corporate tax. Requirement 1: What is Crosby’s cost of equity capital?
Discuss at least two monetary policy tools that you COULD use, the advantages and disadvantages of each, and the effects each has on GDP, exchange rates, interest rates, money supply, stock market and the bond market.
Consider an investment with the following returns:- What is the time-weighted annual return for this investment for the four-year period?
What is the required rate of return for a stock with a beta coefficient, ß , equal to 2.5?
The management of a private hospital is considering the installation of an automatic telephone switchboard, which would replace a manual switchboard and eliminate the attendant operator's position. The class of service provided by the new equipment i..
Custom Machinery, Inc. expects a dividend next year of $4.80 per share, The value of a share of Custom Machinery's common stock is
Wichita State University leased an airplane to fly it's football team. The lease provided that the university would provide liability insurance to cover an deaths or injuries from the operation of the plane. No such insurance was brought. The plane l..
Honest John's Car Dealership advertises his "understandable" financing plan on car purchases as follows. You pay 10% of the car's full price up front and 4% of the car's full price in 30 equal end-of-month payments For instance, if a car cost $15,000..
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