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Say the city of Tucson now has an annual budget of $400 million, and by city charter, it cannot spend more than 10% of its budget on debt service, including both principal and interest payment. The city’s existing annual debt payment is $30 million. Suppose the city needs to borrow $140 million for a capital project, and the debt will be paid back over 20 years with equal annual payments.
If the current interest rate is 5% for a 20-year loan, can the city afford this new debt?
Suppose the current interest rate now has dropped to 3%, can the city afford the debt now?
Please use this example to explain why lower long-term interest rate is desirable in the face of a weak economy.
You have $40,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 15 percent and Stock Y with an expected return of 6 percent. Required: If your goal is to create a portfolio with an expected return of 11.9 percent,..
How much do you need to save each year until retirement to meet your goal?
Consider a two-date binomial model. A company has both debt and equity in its capital structure. The value of the company is 100 at Date 0. At Date 1, it is equally like that the value of the company increases by 20% or decreases by 10%. The total pr..
Calculate the equal annual retirement payment for a 20 year retirement after completing a 46 year employment.
A project currently generates sales of $1 million, variable costs equal 40% of sales, and fixed costs are $.2 million. The firm’s tax rate is 30%. Assume all sales and expenses are cash items. What are the effects on cash flow, if sales increase from..
You are about to buy a home and you have the following two options. For some strange reason you are only allowed to pay the mortgage rate and nothing extra per month.
One strategy was to use a “natural hedge” – meaning it would develop ways to spend money in the same currency as where sales were taking place
Paying off credit cards Simon recently received a credit card with an 12% nominal interest rate.
What interest rate is the bank required by law to report to potential borrowers?
How do you think the stronger U.S. economic conditions could affect capital flows? If capital flows are affected, how would this influence the value of the dollar (holding other factors constant)?
Lower risk free rates results in __________ Put Option prices and ______ Call Option Prices. Which statement regarding executive stock options is correct?
Describe the tax and nontax uses of transfer pricing. Describe the trigger event for US tax liability for an unconsolidated foreign subsidiary. How can tax management be used to influence cost of capital for a multinational corporation? Discuss the d..
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