Leverage refers to the use of borrowed funds to increase a firm's rate of return. True or False True False
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- It is January 1 of year 0, and Merck is trying to determine whether to continue development of a new drug. The following information is relevant. You can assume that all cash flows occur at the ends of the respective years. Clinical trials (the trials where the drug is tested on humans) are equally likely to be completed in year 1 or 2. There is an 80% chance that clinical trials will succeed. If these trials fail, the FDA will not allow the drug to be marketed. The cost of clinical trials is assumed to follow a triangular distribution with best case 100 million, most likely case 150 million, and worst case 250 million. Clinical trial costs are incurred at the end of the year clinical trials are completed. If clinical trials succeed, the drug will be sold for five years, earning a profit of 6 per unit sold. If clinical trials succeed, a plant will be built during the same year trials are completed. The cost of the plant is assumed to follow a triangular distribution with best case 1 billion, most likely case 1.5 billion, and worst case 2.5 billion. The plant cost will be depreciated on a straight-line basis during the five years of sales. Sales begin the year after successful clinical trials. Of course, if the clinical trials fail, there are no sales. During the first year of sales, Merck believe sales will be between 100 million and 200 million units. Sales of 140 million units are assumed to be three times as likely as sales of 120 million units, and sales of 160 million units are assumed to be twice as likely as sales of 120 million units. Merck assumes that for years 2 to 5 that the drug is on the market, the growth rate will be the same each year. The annual growth in sales will be between 5% and 15%. There is a 25% chance that the annual growth will be 7% or less, a 50% chance that it will be 9% or less, and a 75% chance that it will be 12% or less. Cash flows are discounted 15% per year, and the tax rate is 40%. Use simulation to model Mercks situation. Based on the simulation output, would you recommend that Merck continue developing? Explain your reasoning. What are the three key drivers of the projects NPV? (Hint: The way the uncertainty about the first year sales is stated suggests using the General distribution, implemented with the RISKGENERAL function. Similarly, the way the uncertainty about the annual growth rate is stated suggests using the Cumul distribution, implemented with the RISKCUMUL function. Look these functions up in @RISKs online help.)Evaluate the following statements:S1. Any investment income of general borrowing is deducted from capitalizable borrowing cost.S2. If the asset is financed by specific borrowing but a portion is used for working capital purposes, the borrowing shall be treated as general borrowing in determining capitalizable borrowing cost. a.False, False b.False, True c.True, True d.True, FalseThe usual face value for most corporate bonds is $5,000.; True or False
- When a stock market analyst suggests that investors should hold cash instead of stocks or bonds, for what reason are people being encouraged to hold cash? A. speculative demand B. precautionary demand C. transactions demand D. present value demand E. risk-return demandWhich of the following statements are true about exchange rate risk? Check all that apply: a)A Canadian investor with an investment in U.S Treasury bills faces exchange rate risk. b)Exchange rate risk can be hedged using a futures or forward contract in foreign exchange. c)Exchange rate risk arises from the uncertainty in asset returns due to changes in the exchange rate between the currency of the investor and the foreign currency. d)Exchange rate risk can't be perfectly hedged, even if the return earned in the foreign currency is known beforehand.Use the exact interest method (365 days) and the ordinary interest method (360 days) to compare the amount (in $) of interest for the loan. Principal 10,000,000 Rate % 10 Time (days) 1 Exact Interest Ordinary Interest
- Which of the following accounts increases the debit and decreases the credit? Give reasons with the examples. i. Liabilities, owner's equity and revenuesii. Revenues, liabilities, and assetsiii. Expenses, liabilities, and owner's equityiv. Assets and expensesI need answer typing clear urjent no chatgpt Rule 144A allows large financial institutions to trade unregistered securities among themselves. True or FalseExplain, why doesn't an estimated absolute covariance number tell the investor much about the relationship between the returns on the two assets.
- You are managing a portfolio of $1 million. Your target duration is 11 years, and you can choose from two assets: a zero coupon bond with maturity 5 years, and a perpetuity, the yield is: A. .688 B. .417 C. .583 D. .312In the context of capital budgeting, risk refers toSelect one: a.the chance that the internal rate of return will exceed the cost of capital b.the degree of variability of the initial investment. c.the degree of variability of the cash inflows. d.the chance that the net present value will be greater thanzero.What is the sum of Self-Financing+ Borrowing equal to? a. Both of the above responses are correct b. It varies depending on the value each takes c. It consistently equals one