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There are two otherwise identical companies but U is unleveraged and L is leveraged. During a boom both companies make a profit of $250 and $100 when the market is down. The probability of a boom is 60%. The market worth of U is $1500. The risk free debt of L is $700 and with 6% interest on loan the loan expenses are $42. The markets are perfect with no taxes and transaction costs. Investors can borrow and deposit with the risk free interest rate.
a.) What is the market value of L?b.) You invest $60 into stocks of U. Is there an optional investment that can be made into L (combined with a deposit or loan) that provides you exactly the same profits both when the market is up and when it is down? What are the expected profits?c.) The other way around: you invest $60 into stocks of L. By combining a stock purchase of U and deposit/loan, provide a optional strategy that provides the same profits.d.) By using the information in this exercise, prove that MM2 holds.
Suppose you have determined the profitability of a planned project by finding the present value of all the cash flow from that project.
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If the tax rate is 35% and XYZ uses a capital structure of 30% debt and 70% equity. Should the firm undertake this project?
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The Pennington Corporation issued a new series of bonds on January 1, 1979. The bonds were sold at par ($1,000), have a 12 percent coupon, and mature in 30 years, on December 31, 2008.
He can afford to save $4,100 per month for the next 10 years. If he can earn a 10 percent EAR before he retires and a 7 percent EAR after he retires, how much will he have to save each month in years 11 through 30?
Many organizations state that a focus on quality is a critical part of their mission. How does an organization specifically measure achieving quality related goals? What are the financial measurements used in an organization as part of their monit..
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During the last five years you owned two stocks that had the following yearly rates of return, calculate the arithmetic annual rate of return for each stock.
Briarcrest Condiments is spice-making firm. Newly, it developed new process for producing spices. Compute the NPV if discount rate is 13.74%?
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