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Particular security's default risk premium is 6 percent.
Customer Question
particular security's default risk premium is 6 percent. For all securities, the inflation
risk premium is 3 percent and the real interest rate is 2.5 percent. The security's liquidity risk
premium is 1 percent and maturity risk premium is 2 percent. The security has no special covenants.
What is the security's equilibrium rate of return?
2.
Submitted:
1 year ago.
Category:
Multiple Problems
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Customer:
replied 1 year ago.
1. A particular security's default risk premium is 6 percent. For all securities, the inflation
risk premium is 3 percent and the real interest rate is 2.5 percent. The security's liquidity risk
premium is 1 percent and maturity risk premium is 2 percent. The security has no special covenants.
What is the security's equilibrium rate of return?
2. Suppose that the current oneyear rate (oneyear spot rate) and expected oneyear Tbill
rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:
1R1 = 3.0%, E(2R1) = 4.0%, E(3R1) = 12.0%, E(4R1) = 14.0%,
Using the unbiased expectations theory, what is the current (longterm) rate for fouryearmaturity
Treasury securities (1R4)?
3. HydroTech Corp stock was $50 per share a year ago when it was purchased. Since
then, it paid a $4 per share dividend. The stock price is currently $45. If you owned 500 shares of
HydroTech, what was your percent return?
4. Portfolio Return Yeartodate, Company X had earned a 3 percent return. During
the same time period, Company Y earned 12 percent and Company Z earned 7 percent. If you have
a portfolio made up of 50 percent Company X, 30 percent Company Y, and 20 percent Company Z,
what is your portfolio return?
5. You hold the positions in the table below.
COMPANY
PRICE
# *****
BETA
Goodmonth
$25.00
120
1.5
Icestone
$20.00
150
2.5
Bridgerock
$40.00
100
– 1.0
A. What is the beta of your portfolio?
B. If you expect the market to earn 14 percent and the riskfree rate is 4 percent, what is the required return of the portfolio?
6. TAB Inc. has a $1,000 (face value), 10 year bond issue selling for $1,184 that pays an annual coupon of 8.5 percent. What would be TAB's beforetax component cost of debt?
7. Team Sports has 6 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 200 thousand bonds ($1,000 par). If the common shares are selling for $24.50 per share, the preferred share are selling for $20 per share, and the bonds are selling for 65 percent of par, what would be the weight used for equity in the computation of Team's WACC?
8. Suppose that TipsNToes, Inc.'s capital structure features 40 percent equity, 60 percent debt, and that its beforetax cost of debt is 9 percent, while its cost of equity is 15 percent. If the appropriate weighted average tax rate is 25 percent, what will be TipsNToes's WACC?
9. Suppose you sell a fixed asset for $50,000 when its book value is $60,000. If your company's marginal tax rate is 40%, what will be the effect on cash flows of this sale (i.e., what will be the aftertax cash flow of this sale)?
10. Your company has spent $500,000 on research to develop a new computer game. The firm is planning to spend $100,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $5,000. The machine
has an expected life of 3 years, a $100,000 estimated resale value, and falls under the MACRS 5Year class life. Revenue from the new game is expected to be $500,000 per year, with costs of $200,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 10 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will be the net cash flow for year one of this project?
11. Compute the NPV for Project Y and accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent.
TIME:
0
1
2
3
4
5
CASH FLOW:
1000
2,000
3,000
0
1,000
2,500
12. Compute the Payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent and the maximum allowable payback is 5 years.
TIME:
0
1
2
3
4
5
CASH FLOW:
 75
 75
0
100
75
90
13. Compute the IRR statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent.
TIME:
0
1
2
3
4
5
CASH FLOW:
 75
 75
0
100
75
90
14.Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.
TIME:
0
1
2
3
Project A CF:
$  10,000
$ 10,000
$ 30,000
$ 3,000
Project B CF:
$  30,000
$ 10,000
$ 20,000
$ 50,000
Use the Profitability Index (PI) decision rule to evaluate these projects; what is the PI for each project, and which one(s) should it be accepted or rejected?
Expert:
linda_us
replied 1 year ago.
Hello and thank you for requesting me.
Can you kindly advise your deadline.
Thanks.
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Expert:
linda_us
replied 1 year ago.
Thanks for requesting me. Please let me know your deadline.
Ask Your Own Multiple Problems Question
Customer:
replied 1 year ago.
I see that you may have done these questions before. Tomorrow at midnight but I am traveling so I would like to complete it by today if possible. thank you
Customer:
replied 1 year ago.
there are 14 questions
Customer:
replied 1 year ago.
No. Can you send me the answers. I would like it today .... I thought I already answered this question? hmm
Expert:
linda_us
replied 1 year ago.
Hi,
Yes I will send the solution in a short while.
Thanks
Ask Your Own Multiple Problems Question
Expert:
linda_us
replied 1 year ago.
Hi Anna,
Please use this link for the solution.
https://app.box.com/s/awc0p2mypgo1w9yew9up523dp7b18vx4
Thanks
Ask Your Own Multiple Problems Question
Customer:
replied 1 year ago.
I received the link but the answers were not on it. There were 14 questions. Thank you! :)
Expert:
linda_us
replied 1 year ago.
Hi,
Please let me recheck. Give me a minute
Ask Your Own Multiple Problems Question
Expert:
linda_us
replied 1 year ago.
Hi Anna,
The answers are there. Let me highlight them for you :)
Ask Your Own Multiple Problems Question
Expert:
linda_us
replied 1 year ago.
Hi ,
Please use this link. The answers were there, I have now hiGhlighted them in green.
Thanks
https://app.box.com/s/awc0p2mypgo1w9yew9up523dp7b18vx4
Ask Your Own Multiple Problems Question
Customer:
replied 1 year ago.
Thank you very much
Customer:
replied 1 year ago.
Question #9 is not on there......
Expert:
linda_us
replied 1 year ago.
Solution for Number 9
Loss on sale = 6000050000 = 10000
After tax Cash Flow = 50000 + 10000 x 40% (Tax Savings) = 50000+ 4000 = 54000
Please do rate my solution.
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