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Write a general expression for the yield on any debt security (rd) and define these terms: real risk-free rate of interest (r*), inflation premium (IP), default risk premium (DRP), liquidity premium (LP), and maturity risk premium (MRP). Define the nominal risk-free rate (rRF). What security can be used as an estimate of rRF? Describe a way to estimate the inflation premium (IP) for a T-Year bond. What is a bond spread and how is it related to the default risk premium? How are bond ratings related to default risk? What factors affect a company’s bond rating? What is reinvestment rate risk? Which has more reinvestment rate risk, a 1-year bond or a 10-year bond?How are interest rate risk and reinvestment rate risk related to the maturity risk premium? Briefly describe bankruptcy law. If a firm were to default on the bonds, would the company be immediately liquidated? Would the bondholders be assured of receiving all of their promised payments?
The Colin Powell paper.
The two-factor model on a stock provides a risk premium for exposure to market risk of 9%, a risk premium for exposure to interest rate risk of (-1.3%), and a risk-free rate of 3.5%. The beta for exposure to market risk is 1, and the beta for exposur..
Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased. If a company follows a policy of "matching maturities," thi..
The D.J. Masson Corporation needs to raise $400,000 for 1 year to supply working capital to a new store. Masson buys from its suppliers on terms of 1/10, net 90, and it currently pays on the 10th day and takes discounts. What is the effective annual ..
Identify what Southwest Airlines sought to accomplish for its stakeholders. Evaluate Southwest Airlines' actions with respect to employees and customers. Assess Southwest Airlines’ achievements in the area of corporate governance.
ABC Company considers Projects A and B, whose cash flows and the required rate of return (WACC) are shown below. These projects are mutually exclusive and equally risky. The CEO wants to use the IRR criterion, while the CFO recommends the NPV method...
Troy Tec Inc. is expected to produce $100 million FCF (free cash flow) at the end of year 3, $150 million FCF at the end of year 4, $180 million at the end of year 5 and thereafter the FCF is expected to grow at a constant rate of 4%. No FCFs ($0) ar..
Your company is planning to borrow $1 million on a 3-year, 14%, annual payment, fully amortized term loan. What fraction of the payment made at the end of the second year will represent repayment of principal?
Suppose that firm Ds shares are currently selling for $38. After six months it is estimated that the share price will either rise to $43.32 or fall to $33.82. Suppose that a European put option with an exercise price of $41 is written today and will ..
Warmack Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $390,000 is estimated to result in $150,000 in annual pretax cost savings.
Louise Manufacturing uses 2,200 switch assemblies per week and then reorders another 2,200. The relevant carrying cost per switch assembly is $8.50, and the fixed order cost is $1,100. What are the current carrying costs?
Gugenheim, Inc. offers a 7.25 percent coupon bond with annual payments. The yield to maturity is 4.025 percent and the maturity date is 10 years. What is the market price of a $1,000 face value bond?
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