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The current rates are: Spot exchange rate: $2.00/£. Annual interest rate on 60-day U.S. dollar-denominated bonds: 5%. Annual interest rate on 60-day pound-denominated bonds: 11%. Investors currently expect the spot exchange rate to be $1.98/pound in 60 days.
a. Show that uncovered interest parity holds (approximately) at these rates.
b. What is likely to be the effect on the spot exchange rate if the interest rate on 60-day pound-denominated bonds declines to 8 percent? If the dollar interest rate and the expected future spot rate are unchanged, and if uncovered interest parity is reestablished, what will the new current spot exchange rate be? Has the pound appreciated or depreciated?
The common stock of Eddie's Engines, Inc. sells for $37.43 a share. The stock is expected to pay $3.40 per share next year. Eddie's has established a pattern of increasing their dividends by 5.5 percent annually and expects to continue doing so. What..
Futures contracts have less default risk because the exchange acts as the counterparty for all transactions. Forward contracts trade on an organized exchange and are marked to market daily. Companies should always try to reduce risk whenever they can..
On its most recent annual financial statements, Wilmington Casket Company reported total assets of $750,000, total equity of $519,000, sales of $475,000, net income of $98,000 and interest expense of $12,400. What is the common-size statement value o..
When determining returns to your asset allocation, you would use:
Calculate the expected rate of return for each stock separately and calculate the expected rate of return for the portfolio.
Your firm has an average collection period of 29 days. Current practice is to factor all receivables immediately at a 1.25 percent discount. What is the effective cost of borrowing in this case? Assume that default is extremely unlikely
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Wind Power Systems has 20-year, semi-annual bonds outstanding with a 5 percent coupon. The face amount of each bond is $1,000. These bonds are currently selling for 114 percent of face value. What is the company's pre-tax cost of debt?
Estes Park Corp. pays a constant $9.20 dividend on its stock. The company will maintain this dividend for the next 8 years and will then cease paying dividends forever. If the required return on this stock is 12 percent, what is the current share pri..
At the end of the first year of operations, the balance sheet of Midwood Medical Supply showed the following account balances: Accounts Receivable, $4,900; Accounts Payable, $5,900; Inventory, $2,900; and Unexpired Insurance, $1,900. The corporation ..
A stock had returns of 6 percent, –7 percent, 2 percent, and 10 percent over the past 4 years. What is the standard deviation of this stock for the past four years?
Suppose you write 30 put option contracts with a $40 strike. The premium is $2.40. Evaluate your potential gains and losses at option expiration for stock prices of $30, $40, and $50.
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