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Carla and Bill currently have $700,000 in assets and $260,000 in liabilities. Their average cost of debt is fixed at 7%. (note: fixed cost of debt means there is no interest rate risk).
Their consumption and tax rates are 40% and 30% respectively. Taxes are based on returns to assets less interest expense. Suppose the expected rate-of-return on assets is 7.15% and the standard deviation for the rate-of-return on assets is 6.67%. Answer the following questions.
A. What is the expected rate of growth under risk?
B. What are the standard deviation and coefficient of variation of the expected rate of growth?
C. Now, suppose interest rates on debt are subject to unanticipated variability. The expected value and standard deviation of interest rates are 7% and 2%, respectively. The rate of return and interest rates are assumed to be statistically independent. Calculate the expected value, standard deviation, and coefficient of variation of the growth rate. (note: use the information from the original problem. All that has changed is
The weighted average cost of capital is WACC = 10.1%, and the constant growth rate is g = 4.0%. What is the current value of operations?
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You purchased an immediate annuity which pays you $3,000 each year from next year for 15 years. Assuming interest rate is 5%, how much is the equivalent present value of these payments? At the same 4% annual interest rate, the future value of $1,000 ..
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Robert purchased a new copy machine for his business. The copy machine was purchased for $12,500 and is expected to generate the following cash flows for the next four years: What is the net present value? What is the internal rate of return? Should ..
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what is the expected return on a portfolio which is invested 40 percent in stock A and 60 percent in stock B?
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Assume that you have been given the following information on Purcell Industries: Current Stock Price = $15 Stock price of option = $15 Time to maturity of option = 6 months Risk-free rate = 6% Variance of stock return = 0.12 D_1 = 0.24495 N(d_1) = 0...
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