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Suppose the corporate tax rate is 40%. Consider a firm that earns $2,500 in earnings before interest and taxes each year with no risk. The firm's capital expenditures equal its depreciation expenses each year, and it will have no changes to its net working capital. The risk-free interest rate is 4%.
a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity?
b. Suppose instead the firm makes interest payments of $800 per year. What is the value of equity? What is the value of debt?
c. What is the difference between the total value of the firm with leverage and without leverage?
d. To what percentage of the value of the debt is the difference in part (c) equal?
An individual is considering leasing a new car. The initial cost of the car is $18,000 with an estimated life of 5 years and residual salvage value of $4,000 at that time. The car dealer has suggested that the car can be leased for $375 per month for..
Calculate the required rate of return on a company’s stock that has the following characteristics: (a) Constant Growth Rate: 5%, (b) Price: $25.00, and (c) Dividend (Has Been Paid): $5.00.
The principle focus of the IMF bailout efforts during the Asian financial crisis was ________. The authors suggest that exchange rates do adhere to fundamentals in the long-term with substantial deviations from fundamentals in the short-term. The 'te..
Discuss the type of individual securities or mutual funds that you believe are suitable for an aggressive investor whose primary investment goal is capital accumulation over the longer term (say 10 years or more) and why. Now think about an investor ..
Calculate the outstanding loan balance immediately after the 24th payment.
The prices for the white swan corporation for the first quarter of the last year are given below. Find the holding period return (percentage return) for March.
Explain how the Residual Earnings Valuation Model (REVM) is related to the Dividend Valuation Model (DVM), highlighting any key assumptions in your analysis.
Compute the present value of a $3,400 deposit in year 3 and another $2,900 deposit at the end of year 5 if interest rates are 8 percent.
First, find the price of the following Bond X. The interest rate on the bond is 8%, paid semi-annually and the market yield is 9%. The maturity is 10 years. Second, assume Bond Y has the same price as calculated above. Based upon this bond price, and..
Suppose the spot rates for 1 and 2 years are s1=6.3% and s2=6.9% with annual compounding.- What is the forward rate, f1, 2 assuming annual compounding?
Explain why the initial rate for each of the mortgages is different. Make sure to discuss the risk.
How much can City Farm earn in dollars per year on short-term investments made possible by the freed-up cash?
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