Suppose that an analyst has estimated a = 1.0 % and b= 1.10 On a day...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Suppose that an analyst has estimated a = 1.0 % and b= 1.10 On a day where there is good news, US GDP numbers came in very strong, which causes the market goes up by 1.0%. What is the expected return for the stock for the day? If the stock actually rises by 5.0%, what is the Abnormal Return? a. b. HOMEWORK #2 I' + 9. Sawtooth Machinery is considering a 4-year project to manufacture a new line of chainsaws. The project requires an investment of $760,000 and will generate $380,000 per year in earnings before interest, taxes, and depreciation (EBITDA) for the next four years. The investment will be depreciated straight line to zero over four years. In year 4, the company expects to sell the project for $4 million. The tax rate is 35%, and cost of levered equity is 13%. Sawtooth will borrow 40% of the project value and 6% in debt outstanding each year is shown on the table below: (7 pts) 1 228000 0 304000 2 152000 3 76000 4 0 Debt outstanding Use M&M's Proposition II with taxes to calculate the cost of unlevered equity. Use the spreadsheet to show work. 10. What are the unlevered project cash flows in ars 0 through 4? (10 pts) 11. What is the NPV of the project if it were all equity financed? Hint: discount the unlevered cash flows in part (b) using the cost of unlevered equity in part (a) of this problem. (7 pts) 12. What is the NPV of debt financing? Hint: calculate the cash flows each year as the negative of (principal repayment and after-tax interest payment on outstanding debt). (8 pts) 3. A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to borrow €2,000,000 for 3 years and B wants to borrow $3,000,000 for 3 years. The spot exchange rate is $3.00 = €2.00, a swap bank makes the following quotes for 3- year swaps and AAA-rated firms: USD Bid Ask 6.00% 6.50% Euro Bid 7.00% The firm's external borrowing opportunities are: € borrowing 8% 7% A B Ask 7.50% $ borrowing 6% 7% a. Compute the quality spread differential (QSD). (2 points) b. Present a spreadsheet that shows the year-by-year cash flows between the swap bank and the two firms that are mutually beneficial to each party and meets their financing needs. Show all the interest rate payments and receipts. (6 points) c. Assume that after one year, the swap bank updated the quotes: USD Euro Bid Ask Bid 5.50% 6.00% 6.00% Ask 6.50% Assuming that exchange rate is now $1.60/€, show how much the swap is valued to each firm. (rounded to the ones place) (6 points) Suppose that an analyst has estimated a = 1.0 % and b= 1.10 On a day where there is good news, US GDP numbers came in very strong, which causes the market goes up by 1.0%. What is the expected return for the stock for the day? If the stock actually rises by 5.0%, what is the Abnormal Return? a. b. HOMEWORK #2 I' + 9. Sawtooth Machinery is considering a 4-year project to manufacture a new line of chainsaws. The project requires an investment of $760,000 and will generate $380,000 per year in earnings before interest, taxes, and depreciation (EBITDA) for the next four years. The investment will be depreciated straight line to zero over four years. In year 4, the company expects to sell the project for $4 million. The tax rate is 35%, and cost of levered equity is 13%. Sawtooth will borrow 40% of the project value and 6% in debt outstanding each year is shown on the table below: (7 pts) 1 228000 0 304000 2 152000 3 76000 4 0 Debt outstanding Use M&M's Proposition II with taxes to calculate the cost of unlevered equity. Use the spreadsheet to show work. 10. What are the unlevered project cash flows in ars 0 through 4? (10 pts) 11. What is the NPV of the project if it were all equity financed? Hint: discount the unlevered cash flows in part (b) using the cost of unlevered equity in part (a) of this problem. (7 pts) 12. What is the NPV of debt financing? Hint: calculate the cash flows each year as the negative of (principal repayment and after-tax interest payment on outstanding debt). (8 pts) 3. A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to borrow €2,000,000 for 3 years and B wants to borrow $3,000,000 for 3 years. The spot exchange rate is $3.00 = €2.00, a swap bank makes the following quotes for 3- year swaps and AAA-rated firms: USD Bid Ask 6.00% 6.50% Euro Bid 7.00% The firm's external borrowing opportunities are: € borrowing 8% 7% A B Ask 7.50% $ borrowing 6% 7% a. Compute the quality spread differential (QSD). (2 points) b. Present a spreadsheet that shows the year-by-year cash flows between the swap bank and the two firms that are mutually beneficial to each party and meets their financing needs. Show all the interest rate payments and receipts. (6 points) c. Assume that after one year, the swap bank updated the quotes: USD Euro Bid Ask Bid 5.50% 6.00% 6.00% Ask 6.50% Assuming that exchange rate is now $1.60/€, show how much the swap is valued to each firm. (rounded to the ones place) (6 points) Suppose that an analyst has estimated a = 1.0 % and b= 1.10 On a day where there is good news, US GDP numbers came in very strong, which causes the market goes up by 1.0%. What is the expected return for the stock for the day? If the stock actually rises by 5.0%, what is the Abnormal Return? a. b. HOMEWORK #2 I' + 9. Sawtooth Machinery is considering a 4-year project to manufacture a new line of chainsaws. The project requires an investment of $760,000 and will generate $380,000 per year in earnings before interest, taxes, and depreciation (EBITDA) for the next four years. The investment will be depreciated straight line to zero over four years. In year 4, the company expects to sell the project for $4 million. The tax rate is 35%, and cost of levered equity is 13%. Sawtooth will borrow 40% of the project value and 6% in debt outstanding each year is shown on the table below: (7 pts) 1 228000 0 304000 2 152000 3 76000 4 0 Debt outstanding Use M&M's Proposition II with taxes to calculate the cost of unlevered equity. Use the spreadsheet to show work. 10. What are the unlevered project cash flows in ars 0 through 4? (10 pts) 11. What is the NPV of the project if it were all equity financed? Hint: discount the unlevered cash flows in part (b) using the cost of unlevered equity in part (a) of this problem. (7 pts) 12. What is the NPV of debt financing? Hint: calculate the cash flows each year as the negative of (principal repayment and after-tax interest payment on outstanding debt). (8 pts) 3. A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to borrow €2,000,000 for 3 years and B wants to borrow $3,000,000 for 3 years. The spot exchange rate is $3.00 = €2.00, a swap bank makes the following quotes for 3- year swaps and AAA-rated firms: USD Bid Ask 6.00% 6.50% Euro Bid 7.00% The firm's external borrowing opportunities are: € borrowing 8% 7% A B Ask 7.50% $ borrowing 6% 7% a. Compute the quality spread differential (QSD). (2 points) b. Present a spreadsheet that shows the year-by-year cash flows between the swap bank and the two firms that are mutually beneficial to each party and meets their financing needs. Show all the interest rate payments and receipts. (6 points) c. Assume that after one year, the swap bank updated the quotes: USD Euro Bid Ask Bid 5.50% 6.00% 6.00% Ask 6.50% Assuming that exchange rate is now $1.60/€, show how much the swap is valued to each firm. (rounded to the ones place) (6 points) Suppose that an analyst has estimated a = 1.0 % and b= 1.10 On a day where there is good news, US GDP numbers came in very strong, which causes the market goes up by 1.0%. What is the expected return for the stock for the day? If the stock actually rises by 5.0%, what is the Abnormal Return? a. b. HOMEWORK #2 I' + 9. Sawtooth Machinery is considering a 4-year project to manufacture a new line of chainsaws. The project requires an investment of $760,000 and will generate $380,000 per year in earnings before interest, taxes, and depreciation (EBITDA) for the next four years. The investment will be depreciated straight line to zero over four years. In year 4, the company expects to sell the project for $4 million. The tax rate is 35%, and cost of levered equity is 13%. Sawtooth will borrow 40% of the project value and 6% in debt outstanding each year is shown on the table below: (7 pts) 1 228000 0 304000 2 152000 3 76000 4 0 Debt outstanding Use M&M's Proposition II with taxes to calculate the cost of unlevered equity. Use the spreadsheet to show work. 10. What are the unlevered project cash flows in ars 0 through 4? (10 pts) 11. What is the NPV of the project if it were all equity financed? Hint: discount the unlevered cash flows in part (b) using the cost of unlevered equity in part (a) of this problem. (7 pts) 12. What is the NPV of debt financing? Hint: calculate the cash flows each year as the negative of (principal repayment and after-tax interest payment on outstanding debt). (8 pts) 3. A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to borrow €2,000,000 for 3 years and B wants to borrow $3,000,000 for 3 years. The spot exchange rate is $3.00 = €2.00, a swap bank makes the following quotes for 3- year swaps and AAA-rated firms: USD Bid Ask 6.00% 6.50% Euro Bid 7.00% The firm's external borrowing opportunities are: € borrowing 8% 7% A B Ask 7.50% $ borrowing 6% 7% a. Compute the quality spread differential (QSD). (2 points) b. Present a spreadsheet that shows the year-by-year cash flows between the swap bank and the two firms that are mutually beneficial to each party and meets their financing needs. Show all the interest rate payments and receipts. (6 points) c. Assume that after one year, the swap bank updated the quotes: USD Euro Bid Ask Bid 5.50% 6.00% 6.00% Ask 6.50% Assuming that exchange rate is now $1.60/€, show how much the swap is valued to each firm. (rounded to the ones place) (6 points)
Expert Answer:
Answer rating: 100% (QA)
SOLUTION 1 a The expected return for the stock for the day is a 10 10 good news 20 b If the stock ac... View the full answer
Related Book For
Statistics The Art And Science Of Learning From Data
ISBN: 9780321755940
3rd Edition
Authors: Alan Agresti, Christine A. Franklin
Posted Date:
Students also viewed these finance questions
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
As speed increases for an object in free fall, does acceleration increase also?
-
Jayden calculates his 2017 income tax by using both the Tax Tables and the Tax Rate Schedules. Because the Tax Rate Schedules yield a slightly lower tax liability, he plans to pay this amount. a. Why...
-
Yan Yan Corp. has a $2,000 par value bond outstanding with a coupon rate of 4.7 percent paid semiannually and 13 years to maturity. The yield to maturity of the bond is 5.05 percent. What is the...
-
You need to understand the approach described in question 3 in More Genetic TIPS before answering this question. A muscle-specific gene was cloned and then subjected to promoter bashing. As shown...
-
Prescott, Inc., manufactures bookcases and uses an activity-based costing system. Prescotts activity areas and related data follow: Prescott produced two styles of bookcases in October: the standard...
-
Q1. A common base transistor amplifier has an input resistance of 20 Q and output resistance of 100 kn. The collector load is 1 kQ. If a signal of 500 mV is applied between emitter and base, find the...
-
On 1 October 2010 Prodigal purchased 75% of the equity shares in Sentinel. The acquisition was through a share exchange of two shares in Prodigal for every three shares in Sentinel. The stock market...
-
What is the expected return of the four-stock portfolio described below? Common Stock ABCD Expected Return (ER) Weight 6.9% 10% 8.1% 40% 2,9% I 25% 3.8% 25% Portfolio's Expected Return
-
Pink's earned income was $62,000 in 2020. There was a pension adjustment of $2750 in 2020. There is also a pension adjustment reversal of $875 and a past service pension adjustment of $500 in 2021....
-
Project Z has an initial investment of $98,846.00 . The project is expected to have cash inflows of $23,932.00 at the end of each year for the next 12.0 years. The corporation has a WACC of 13.41%....
-
Please teach how to solve problems of "HashMap.java" and "Main.java", problems are in comments of "HashMap.java" and "Main.java" Please showing the output Thank you (Please let every test must...
-
A. If assume that majority people think that the price of APPLE will not move much in the next three months, then would a Butterfly option trading strategy on APPLY options be still profitable?...
-
The following are a series of unrelated situations Answer the questions relating to each of the five independent situations as requested. 1. Grouper Company's unadjusted trial balance at December 31,...
-
A bar of length = 1 has one fixed and one free end and stiffness function c(x) = 1 - x. Find the displacement when subjected to a unit force. Pay careful attention to the boundary condition at the...
-
In 2000 the GSS asked whether a subject is willing to accept cuts in the standard of living to help the environment (GRNSOL), with categories (vw = very willing, fw = fairly willing, nwu = neither...
-
In 2008, the murder rates (per 100,000 residents) for the 50 states and the District of Columbia (D.C.) had a mean of 5.39 and a standard deviation of 4.434 (Statistical Abstract of the United...
-
Based on records of automobile accidents in a recent year, the Department of Highway Safety and Motor Vehicles in Florida reported the counts who survived (S) and died (D), according to whether they...
-
Consider the following time series data. a. Construct a time series plot. What type of pattern exists in the data? b. Show the four-quarter and centered moving average values for this time series. c....
-
The following table reports prices and usage quantities for two items in 2009 and 2011. a. Compute price relatives for each item in 2011 using 2009 as the base period. b. Compute an unweighted...
-
Refer to exercise 35. a. Deseasonalize the time series using the adjusted seasonal indexes computed in part (c) of exercise 35. b. Using Minitab or Excel, compute the linear trend regression equation...
Study smarter with the SolutionInn App