1-The real rate of interest has been estimated to be 3 percent, and the expected long-term annual inflation rate is 7 percent.
a. what is the current risk-free rate of return on 1-year Treasury Bonds?
b. If the yield on 10-year U.S. Treasury bonds is 12 percent, what is the maturity risk premium between a 10-year bond and a 1-year bond?
c. If American Airlines bonds, scheduled to mature in 10 years, currently sell to yield 13 percent, what is the default risk premium on these bonds?
d. If investors in the common stock of American Airlines require a 16 percent rate of return, what is the seniority risk premium on American’s common stock?
The real rate of interest has been estimated to be 3 percent, and the expected long-term annual inflation rate is 7 percent.
A. What is the current risk-free rate of return on 1-year Treasury bonds?
B. If investors in the common stock of American Airlines require a 16 percent rate of return, what is the seniority risk premium on Americans’ common stock?
2- Fox Enterprises is considering expanding into the growing laser copier business. Fox estimates that this expansion will cost $1.8 million and will generate a 20 year stream of expected net cash flows amounting to $400,000 per year. The company''s weighted cost of capital is 15%.
A. Compute the net present value of the laser copier project using the company''s weighted cost of capital and the expected cash flows from the project.
B. Using the risk-adjusted discount rate approach, management has decided that this project has substantially more risk than average and has decided that it requires a 24 percent expected rate of return on projects like this. Recompute the risk-adjusted net present value of this project.
3-Jersey Computer Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure: Proportion of Debt After-tax Cost of Debt, ki Cost of Equity, ke 0.00 0.10 0.20 0.30 0.40 0.50 0.60 — 4.7% 4.9 5.1 5.5 6.1 7.5 12.0% 12.1 12.5 13.0 13.9 15.0 17.0 a. Determine the fi rm’s optimal capital structure, assuming a marginal income tax rate (T) of 40 percent. b. Suppose that the fi rm’s current capital structure consists of 30 percent debt (and 70 percent equity). How much higher is its weighted cost of capital than at the optimal capital structure?
4- The Garcia Industries balance sheet and income statement for the year ended 2006 are as follows:?
Balance Sheet (in Millions of Dollars)
Assets Liabilities and Stockholders’ Equity .
Cash $6.0 Accounts payable $10.0
Accounts receivable 14.0 Salaries, benefits, & payroll taxes payable 2.0
Inventories* 12.0 Other current liabilities 10.0
Fixed assets, net 40.0 Long-term debt 12.0
$72.0 Stockholders’ equity 38.0
$72.0
*The average inventory over the pas 2years also equals $12.0 million .
Income Statement (in Millions of Dollars)
Net Sales $100.0
Cost of Sales 60.0
Selling, general, and administrative expenses 20.0
Other expenses 15.0
Net income $ 5.0
A. Determine the length of the inventory conversion period.
B. Determine the length of the receivables conversion period.
C. Determine the length of the operating cycle.
D. Determine the length of the payables deferral period.
E. Determine the length of the cash conversion cycle.
F. What is the meaning of the number you calculated in (e)?
5 --Set up the amortization schedule for a 5-year, $1 million, 9 percent term loan that requires equal annual end-of-year payments plus interest on the unamortized loan balance. What is the effective interest cost of this loan?