Derivative, security
1. What is (Microsoft) reported retained earnings? How much is 10 percent of the company's retained earnings worth?
Assume the company is considering using an amount equal to 10 percent of its retained earnings to invest in one of the two mutually exclusive projects:
1) The first project will generate cash flows of 36 percent of the invested amount for the first year, 34 percent of the invested amount for the second year, 32 percent of the invested amount for the third year, 30 percent of the invested amount for the fourth year and 28 percent of the invested amount for the fifth year. What are the yearly cash flows for this project?
2) The second project will generate a cash flow of two times the invested amount in year five of the project. What is the cash flow for this project in the fifth year?
The Company's required rate of return (WACC) is 10.18%. What is the project's payback period, net present value, and internal rate of return? Which project should be accepted? Why?
Please include sources.
Determine what derivative security could be used in a company that you would like to work for. How would this derivative security help in the risk management of this company? What could be some possible dangers of using this derivative security?