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A bank offers a client a choice between two financing options for a one-year period: Option1: a term-loan for the full year of $500,000 to be repaid at the end of the year with interest fixed at 12% per year. Option 2: An overdraft, with a quoted rate of 14% per year, with interest charged quarterly on the average balance. The firm expects to need finance, on average, $400,000 in the first quarter, $500,000 in quarter 2, $500,000 in quarter 3 and only $200,000 in the final quarter due to the seasonal nature of its business. Unused funds can be invested at 2% per quarter (compounded quarterly). The bank will however not charge interest on accumulated quarterly interest charges (simple interest only). Which option would you recommend to the client? Support your answer with detailed computations.
Suppose that an investment earning 6% interest compounded continuously has a balance of $4500 after 4 years. Find the amount of the investment as follows: Write an equation by using the given information in the compound continuous interest formula.
A firm has a market value equal to its book value. Currently, the firm has excess cash of $2,000 and other assets of $13,000. Equity is worth $15,000. The firm has 1,000 shares of stock outstanding and net income of $2,500. By what percent does the s..
Value a Constant Growth Stock Financial analysts forecast Safeco Corp.’s (SAF) growth rate for the future to be 8 percent. Safeco’s recent dividend was $0.88. What is the value of Safeco stock when the required return is 12 percent?
Which of the following is most accurate regarding the advantages and disadvantages of the methods used to compute a company’s cost of equity? A disadvantage of the Security Market Line (SML) is that it does not explicitly consider risk
What would be the net present value of a microwave oven that costs $173 and will save you $82 a year in time and food away from home? Assume an average return on your savings of 5 percent for 5 years. (Hint: Calculate the present value of the annual ..
What is the (1) marginal and (2) average tax rate paid for a firm with taxable income of a). $25,000? b). $85,000? c). $250,000? d). $12 million? e). $200 million?
You are saving money for a down payment on a house. Suppose you want to have total savings of $20,000 in 10 years time and you have currently $5,000. What annual interest rate do you need to earn on your initial investment, assuming you contribute no..
Find the WACC for a firm with the following characteristics. A few years ago the firm issued $4,000,000 debt with a coupon rate of 4%; currently that debt is trading with a yield to maturity of 5.5% and a value of $3,500,000. The firm plans on keepin..
Agency law plays a big part in corporate responsibility (and liability). Differentiate between an employee and an independent contractor. What is the difference and what are the key factors that must be considered in determining one’s status as an em..
Compute the price of a 6.1 percent coupon bond with fifteen years left to maturity and a market interest rate of 9.0 percent.
Digital Imaging (DI) produces photo printers for both the professional and consumer markets. The DI consumer division recently introduced two photo printers that provide color printsrivaling those produced by a professional processing lab. The recomm..
A six-year, semiannual coupon bond is selling for $991.38. The bond has a face value of $1,000 and a yield to maturity of 9.19 percent. - What is the coupon rate?
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