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The treasurer of a small bank has borrowed funds for 3 months at an interest rate of 6.73% and has lent funds for 6 months at 7.87%.
a. Represent the exposure on cash flow diagrams.
b. To cover his exposure created by the mismatch of maturities, the dealer signs a forward loan. Calculate this treasurer's break-even forward rate on interest, assuming no other costs.
c. Assume that instead, the treasurer decides to wait 3 months and take a spot loan then. To cover his exposure, the treasurer signs a 3 times 6 FRA. (i) Use cash flow diagrams to show how times achieves his goal, (ii) What is the settlement amount is the forward rate is 6.87%, the Libor rate on settlement date is 6.09%, and the amount the bank needed to cover the mismatch is 38 million?
Micro Spinoffs Inc. issued 20-year debt a year ago at par value with a coupon rate of 5%, paid annually. Today, the debt is selling at $1,380. If the firm’s tax bracket is 20%, what is its percentage after-tax cost of debt? Assume a face value of $1,..
The Extreme Reaches Corp. last paid a $1.50 per share annual dividend. The company is planning on paying $3.00, $5.00, $7.50, and $10.00 a share over the next four years, respectively. After that the dividend will be a constant $2.50 per share per ye..
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Suppose you are a U.S. investor who is planning to invest $785,000 in Mexico. Your Mexican investment gains 10%. If the exchange rate moves from 12.2 pesos per dollar to 12.5 pesos per dollar over the period, what is your total return on this investm..
The constant dividend growth model is:
Prepare a balance sheet according to the format recommended by IAS 1 - Presentation of Financial Statements. - Show your computation of cash and cash equivalents.
ABC, Inc. has a foreign subsidiary in a country that is prone to instability. takes its toll on ABC in the form of eroding shareholder wealth.
Assume your require a 10 percent return on your investment. If you apply the discounted payback criterion,
Mr. & Mrs. Shaw invest 60% of funds in stock A and the remainder in stock B. The standard deviation of returns for stock A is 10% and stock B it is 20%. Calculate the variance of portfolio returns and standard deviation assuming the correlation betwe..
Hedging to offset risk (LO5) The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at $138,000 per contract. What will be the profit or loss on the f..
The return from the market last year was 12% and the risk free rate was 6%. A hedge fund manager with a beta of 0.6 has an alpha of 5%. What return did the hedge fund manager earn?
The Simmons Company expects earnings of $30 million next year. Its dividend payout ratio is 40 percent, and its proportion of debt (debt/assets ratio) is 55 percent. Simmons uses no preferred stock. What amount of retained earnings does Simmons expec..
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