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Assume the inflation rate is 100% per year and the nominal rate of interest is 700% per year.
(This was also our apples example from Section 5.2.)
Now, assume that there is also a 25% default rate. That is, 1 in 4 apples are returned with worms inside and will therefore not be sellable (and be worth $0). What is your real rate of return? What is the formula?
cost of capital equal to the expected return on the market which is 12%. project Used books 0.85 Beta 12% expected return. if the projects are mutually exclusive, which one would be accept.
Assume that k* = 1.5; the maturity risk premium is found as MRP=0.09(t-1) where t= years to maturity; the default risk premium for Corporate bonds is found as DRP= 0.11% (t-1); the liquidity premium is 0.8; and inflation is expected to be 2% in years..
Your friend is the owner of a stock which had returns of 25 percent, -36 percent, 1 percent, and 16 percent for the past four years. Your friend thinks the stock may be able to achieve a return of 50 percent or more in a single year. Based on these r..
A 20-year, $200,000 loan at a nominal annual interest rate of 12% convertible monthly is being paid off via the sinking fund method. The nominal annual interest rate earned on the sinking fund is 9% convertible monthly. What is the net amount of inte..
ACME will pay a quarterly dividend per share of $.75 at the end of each of the next 12 quarters. Thereafter, the dividend will grow at a quarterly rate of 1% forever. The appropriate discount rate on the stock is 10%, compounded quarterly. What is th..
Calculate the WACC for PG given the following: a) The company has outstanding debt that matures in 20 years that has a coupon of 9%. It pays interest semi-annually and the bonds are callable in 3 years at a 3% premium to par. Calculate a new the WACC..
Your firm purchases goods from its supplier on terms of 1.1 / 10, net 30. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 30? What is the effective annual cost to your firm if it choo..
Obesity is perceived to be a national health problem in the United States. One suggestion to deal with this problem is a “fat tax.” The idea is to levy a tax on foods containing more than a government prescribed percentage of the daily minimal fat in..
Which of the following tendencies of individual investors is called the disposition effect?
Sarah was contemplating making a contribution to her traditional IRA in 2014. She determined she would contribute $5,000 in December 2014, but forgot about making the contribution until she was preparing her 2014 tax return in February 2015. Use the ..
Compensation for risk is an essential function of financial markets and, as such, disclosure of risk occurs routinely in required financial disclosures. Senior management officials must be able to assess risks that affect the firms they manage, and s..
Portfolio Weights If you own 270 shares of Air Line Inc at $18.95, 170 shares of BuyRite at $9.9, and 370 shares of Motor City at $45.95, what are the portfolio weights of each stock?
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