After doing some research‚ Guillermo identified some possible investment options that would improve his businesses ’ financial condition. A capital budget evaluation will help to determine which capital investment decisions will provide the greatest returns. Choosing the right techniques could is very important to the success of the project and organization. An overview of each possible technique provide it this paper before explaining how the how the recommendation was made. After considering
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provisions relating to collateral‚ sinking funds‚ dividend policy‚ and further borrowing. The issuing firm agrees to these so called protective covenants in order to market its bonds to investors concerned about the safety of the bond issue. The coupon rate‚ maturity date‚ and par value of the bond are part of the bond indenture. Sinking fund: a bond indenture that calls for the issuer to periodically repurchase some proportion of the outstanding bonds prior to maturity Differs from the call provision
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for $12‚000 per year. The project will require $50‚000 in fixed assets with expected salvage of $10‚000 at the end of the project (depreciate straight-line to salvage value) and an initial $10‚000 increase in NWC. Your marginal tax rate = 34% and the required return = 15%. What is your minimum bid? NPV = 0 = -60‚000 + OCF(PVIFA15%‚3) + 20‚000(PVIF15%‚3) NPV = 0 = -60‚000 + (NI + Dep)(2.2832) + 20‚000(0.6575) NPV = 0 = -60‚000 + [(S – VC – FC - Dep)(1 – T) + Dep](2.2832) + 13‚150.32
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include: C. Business risk and financial risk 3.) The real risk-free rate is affected by a two factors: E. Time preference for income for consumption and the set of opportunities available in the economy. 4.) Two factors that influence the nominal risk-free rate are: A. The relative ease or tightness in capital markets and the expected rate of inflation 5.)The total risk for a security can be measured by its: C. Standard Deviation or returns 6.) Which of the following is an underwriting function? B. Risk-bearing
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given the following long-run annual rates of return for alternative investment instruments: * US Government T-Bills 3.5% * Large-cap common stocks 12.1% * Long-term corporate bonds 6.2% * Long-term government bonds 5.6% * Small-capitalization common stock 14.6% The annual rate of inflation during the period was 2.9%. Compute the real rate of return on these investment alternatives. 2. The following are the monthly rates of return for TECO Electric and Gold Hill
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Choice: Conceptual Easy: Required return Answer: e Diff: E [i]. An increase in a firm’s expected growth rate would normally cause the firm’s required rate of return to a. Increase. b. Decrease. c. Fluctuate. d. Remain constant. e. Possibly increase‚ possibly decrease‚ or possibly remain unchanged. Required return Answer: d Diff: E [ii]. If the expected rate of return on a stock exceeds the required rate‚ a. The stock is experiencing supernormal
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of his money at an annual interest rate of 6%‚ the rest at 9% annual rate. The return on these two investments over one year is $1‚440. How much does he invest at each rate? Solution Paul made two investments totaling $15‚000. The percentage return on the first investment was 7% annually‚ while the the percentage return on the second one was 10% annually. If the total return on the two investments over one year was $1‚350‚ how much was invested at each rate? Ben invested $30‚000‚ part
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(required return) for calculating the net present value of a project ’s cash flows? - it will help us determine the Cost of capital or discount rate which we can use to calculate NPV‚ in other terms the numerator will never change (FCF)‚ only the denominator will based on the cost of capital 3. What is the estimate of the risk-free rate that should be employed in calculating the cost of capiual for Ameritrade ’s proposed investment? - the risk free rate should be the T-bills rate or the average
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CHAPTER TWO INTEREST RATES Chapter Objectives After studding this chapter‚ you will be able to: Define what interest rate is Realize the functions of interest rate in the economy Know the distinction between interest rate and returns Explain the different theories of the rate of interest as well as the limitations of each theories 2.1 INTRODUCTION The money and capital markets are one of the vast pools of funds‚ depleted by the borrowing activities of households‚ businesses
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periods‚ or calculate what rate of return is implied by a given set of cash flows Single Period – Rate of Return * N = amount of years * I% = x (what we’re trying to find) * PV = How much it’s worth today * FV = How much it’s worth at maturity date * Discount bonds pay no interest during it’s life‚ the interest you receive is part of the final payment (FV) * The interest rate is also known as the discount rate * The rate that makes us indifferent between
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