Managerial Economics

The fixed cost is assumed that Larry has discovered the other fixed cost incurred. The total investment is $800,000. The worst case scenario assumes that Larry got a total line of credit from the bank in the amount of $400,000 and invested $400,000 from other source. The Notes payable – short term and the long-term debt is (11.8 + 3.7) = 15.5 % from Table F in the handout. The Loan interest and payment per year is ($400,000 * 0.155)= $62,000. The Income data from Table F indicates that there is a 0.4% of all other expenses net out of the total sales which equals to $109,908 (5,700,666 gallons * $4.82 *0.4%) .

2. a. According to the simulation spreadsheet, 4 hours of investment in creation maximizes daily profit at $371.33.

Problem 1.8. Suppose you own 5,000 shares that are worth $25 each. How can put options be used to provide you with insurance against a decline in the value of your holding over the next four months? You should buy 50 put option contracts (each on 100 shares) with a strike price of $25 and an expiration date in four months. If at the end of four months the stock price proves to be less than $25, you can exercise the options and sell the shares for $25 each.

Southlake Corporation issued $900,000 of 8% bonds on March 1, 20X1. The bonds pay interest on March 1 and September 1 and mature in 10 years. Assume the independent cases that follow.

14. Global Enterprises has just signed a $3 million contract. The contract calls for a payment of $.5 million today, $.9 million one year from today, and $1.6 million two years from today. What is this contract really worth if Global Enterprises can earn 12 percent on its money?

K2B concludes that the investment must earn at least an 8% return. Compute the net present value of this investment. (Round the net present value to the nearest dollar.)

1.00 point A bond with a 7-year duration is worth $1,073, and its yield to maturity is 7.3%. If the yield to maturity falls to 7.21%, you would predict that the new value of the bond will be approximately _________.

- The Bet-r-Bilt Company has a 5-year bond outstanding with a 4.30 percent coupon. Interest payments are paid semi-annually. The face amount of the bond is $1,000. This bond is currently selling for 93 percent of its face value. What is the company's pre-tax cost of debt?

Homework 2 Solution, Fin 500Q, Quantitative Risk Management 1. Assume gold price risk is diversifiable, and the riskless rate is 5%. A firm produces a unit of gold a year from today. Assume all interest is compounded annually and is tax deductible. The price of gold is either $500 or $200, each with probability 0.5. Suppose the firm pays taxes at a rate of 40% for all its cash flow in excess of $300. The value of the firm is the expected discounted value of its cash flow less the expected discounted value of bankruptcy costs and taxes that it pays. The firm can hedge by buying/selling forward contracts on gold. Start by assuming that bankruptcy costs are zero. (a) Find the value of the unhedged unlevered firm. (10 points) Answer: 1 · [350 − 0.5 ·

Calculate the Nominal Payback, the Discounted Payback, the Net Present Value and the IRR assuming:

with 〖PV〗_l (t) = $4,999,516.42 (90% of totally used money), rl = 8%, and T-t = 23/365. This results in 〖FV〗_l (T) $5,024,783.10 which Jim has to pay back to the bank. The same formula can be applied to calculate the expected future value of the own funds with 〖FV〗_o (T) = $502,478.31 (it also assumes r = 8% interest). The underlying stock which Jim bought at t can be sold for S(T) at March 21st. As Jim bought the underlying he will also receive dividends worth $12,371.48. With regard to the short futures, Jim has to buy shares at S(T) which he then can sell at a price of $5,016,800.00 (see Figure 2).

b) What is the firm’s forecasted average daily sales for the first three months of operations? For the entire half-year?

|5000 employees at the beginning of the 1990s, it has grown to exports of $70 billion and 2.8 million employees today, and a globally dominating |

Time to expiration Forward price Annualized lease rate 3 months $70.70 0.0101987 6 months $71.41 0.0101147 9 months $72.13 0.0100336 12 months $72.86 0.0099555 The lease rate is less than the risk-free interest rate. The forward curve is upward sloping, thus the prices of exercise 6.1. are an example of contango. Question 6.2. The spot price of oil is $32.00 per barrel. With a continuously compounded annual

The settlement price at the end of this day is $50,200. How much does the member have to add to its margin account with the exchange clearinghouse? The clearinghouse member is required to provide 20 × $2, 000 = $40, 000 as initial margin for the new contracts. There is a gain of (50,200 − 50,000) × 100 = $20,000 on the existing contracts. There is also a loss of (51, 000 − 50, 200) × 20 = $16, 000 on the new contracts. The member must therefore add 40, 000 − 20, 000 + 16, 000 = $36, 000 to the margin account. Problem 2.16. On July 1, 2010, a Japanese company enters into a forward contract to buy $1 million with yen on January 1, 2011. On September 1, 2010, it enters into a forward contract to sell $1 million on January 1, 2011. Describe the profit or loss the company will make in dollars as a function of the forward exchange rates on July 1, 2010 and September 1, 2010. Suppose F1 and F2 are the forward exchange rates for the contracts entered into July 1, 2010 and September 1, 2010, and S is the spot rate on January 1, 2011. (All exchange rates are measured as yen per dollar). The payoff from the first contract is (S − F1 ) million yen and the payoff from the second contract is (F2 − S ) million yen. The total payoff is therefore ( S − F1 ) + ( F2 − S ) = ( F2 − F1 ) million yen.