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FINANCE 620 Assignments

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Question;1.;(WACC) If Wild Widgets;Inc., were an all-equity company, it would have a beta of.85. The company has;a target debt?equity ratio of.40. The expected return on the market portfolio;is 11 percent, and Treasury bills currently yield 4 percent. The company has;one bond issue outstanding that matures in 20 years and has a coupon rate of 7;percent. The bond currently sells for $1,080. The corporate tax rate is 34;percent.;a) What is the company?s cost of debt? (Do not round intermediate;calculations and round your final answer to 2 decimal places. (e.g., 32.16));Cost;of debt ???????????_______%;b) What is the company?s cost of equity? (Do not round intermediate;calculations and round your final answer to 2 decimal places. (e.g., 32.16));Cost;of equity ______%;c) What is the company?s weighted average cost of capital? (Do not;round intermediate calculations and round your final answer to 2 decimal;places. (e.g., 32.16));WACC;%;2.;(IPO Underpricing) The;Woods Co. and the Garcia Co. have both announced IPOs at $40 per share. One of;these is undervalued by $9, and the other is overvalued by $4, but you have no;way of knowing which is which. You plan on buying 1,000 shares of each issue.;If an issue is underpriced, it will be rationed, and only half your order will;be filled.;a);If you could get 1,000 shares;in Woods and 1,000 shares in Garcia, what would your profit be? (Do not round;intermediate calculations.);Profit _______$;b);What profit do you actually;expect? (Do not round intermediate calculations.);Expected profit ??______$;3.;(Lease or Buy) Wolfson;Corporation has decided to purchase a new machine that costs $3.2 million. The;machine will be depreciated on a straight-line basis and will be worthless;after four years. The corporate tax rate is 35 percent. The Sur Bank has;offered Wolfson a four-year loan for $3.2 million. The repayment schedule is;four yearly principal repayments of $800,000 and an interest charge of 9;percent on the outstanding balance of the loan at the beginning of each year.;Both principal repayments and interest are due at the end of each year. Cal;Leasing Corporation offers to lease the same machine to Wolfson. Lease payments;of $950,000 per year are due at the beginning of each of the four years of the;lease.;a);What is the NAL of leasing for;Wolfson? (Do not round intermediate calculations and round your final answer to;2 decimal places. (e.g., 32.16));NAL _______$;b);What is the maximum annual;lease Wolfson would be willing to pay? (Enter your answer in dollars, not;millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and;round your answer to the nearest whole dollar amount. (e.g., 32));Annual lease payment ?______$;4.;(Black-Scholes) A stock is;currently priced at $35. A call option with an expiration of one year has an;exercise price of $50. The risk-free rate is 7 percent per year, compounded;continuously, and the standard deviation of the stock?s return is infinitely;large. What is the price of the call option?;Call option price ______$;5.;(Put-Call Purity) A put;option and a call option with an exercise price of $85 and three months to;expiration sell for $2.40 and $5.09, respectively.;If the risk-free rate is 4.8 percent per year, compounded;continuously, what is the current stock price? (Do not round intermediate;calculations and round your final answer to 2 decimal places. (e.g., 32.16));Current stock price ________$;6.;(Marking to Market) You are;long 10 gold futures contracts, established at an initial settle price of;$1,580 per ounce, where each contract represents 100 ounces. Over the;subsequent four trading days, gold settles at $1,587, $1,582, $1,573, and;$1,584, respectively.;a);Calculate the profit or loss;for each trading day. (A negative amount should be indicated by a minus sign.;Do not round intermediate calculations.);Choose: Profit/Loss;Day 1 $;Day 2 $;Day 3 $;Day 4 $;b);Compute your total profit or;loss at the end of the trading period. (Input amount as a positive value. Do;not round intermediate calculations.);$______ (Profit or Loss);7.;(Duration) What is the duration;of a bond with three years to maturity and a coupon of 7 percent paid annually;if the bond sells at par? (Do not round intermediate calculations and round;your final answer to 5 decimal places. (e.g., 32.16161));Duration;8.;You enter into a forward;contract to buy a 10-year, zero coupon bond that will be issued in one year.;The face value of the bond is $1,000, and the 1-year and 11-year spot interest;rates are 5 percent and 7 percent, respectively.;a);What is the forward price of;your contract? (Do not round intermediate calculations and round your final;answer to 2 decimal places. (e.g., 32.16));Forward price $;b);Suppose both the 1-year and;11-year spot rates unexpectedly shift downward by 2 percent. What is the new;price of the forward contract? (Do not round intermediate calculations and;round your final answer to 2 decimal places. (e.g., 32.16));New forward price $

 

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