Suppose Intel is considering building a new chip-making factory. Would Intel compare the expected rate of return on the factory to the bond market interest rate when deciding whether to build the factory? If Intel needs to borrow money in the bond market, how might the bond interest rate affect Intel's decision whether to build the factory? If Intel has enough of its own funds to finance the new factory without borrowing, would the bond interest rate affect their decision whether to build the factory?
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- Suppose you live in the Fama-French three-factor model world. Goldman Sachs is selling two derivative securities to your company. Both will pay 100 million dollars over a 10 year period. Assume time value of money is zero. Security A will pay out cash that is positively correlated with economic indicators, thus paying out more when economy is booming and less when economy is tanking. Security B will pay out cash that is negatively correlated with economic indicators, thus paying out more when economy is tanking and less when economy is booming. What should be the fair valuation of these two securities at the start of this 10 year period. A<100 million; B>100 million A=B Both are smaller than 100 million and A<B Both securities should be priced lower than 100 millions. But A>BWhat are some of the major differences between loans for residential and commercial real estate? What types of risk does the LENDER face in making commercial real estate loans? What potential benefits does the lender receive? What types of risk does the BORROWER (or OWNER) face when taking a commercial real estate loan? What is the potential benefit? What is meant by positive financial leverage? What about negative financial leverage? What drives the spread between 10-year commercial mortgage rates and the 10-year Treasury yield seen in Exhibit 16-2?Suppose a new and more liberal Congress and administration are elected. Their first orderof business is to take away the independence of the Federal Reserve System and to forcethe Fed to greatly expand the money supply. What effect will this have:a. On the level and slope of the yield curve immediately after the announcement?b. On the level and slope of the yield curve that would exist 2 or 3 years in the future?
- If the Fed were to reduce course and suddenly start buying twice as much federal debt as it has in the past, pushing bond prices up, what would happen to the yields on federal debt? a) Go up b) Go down c) Stay the sameThere are two firms, A and B. Each firm needs $200 to finance a project. Firm A's project produces $250 with probability 0.9 and nothing with probability 0.1. Firm B's project produces $510 with probability 0.4 and nothing with probability 0.6. Neither firm has any funding. Each firm has to sell a bond for $200 to nance its project. The bond promises a payment in a year, when the project is complete. If the project produces nothing, the firm defaults. The savers have access to risk-free bond with the yield of 5%. The savers are risk neutral. a. Consider the symmetric information case. Will the bond be issued? b. Consider the asymmetric information case. The savers do not know which firm they are dealing with, A or B. They know that it is A with probability 0.6 and B with probability 0.4. Will the bond be issued?You are an assistant analyst at a financial consulting company. You havebeen asked to prepare a report for your manager who is advising a newclient on using interest rate derivatives to hedge against interest ratemovements.The client is hoping to increase production capacity by 50% in the next twoto three years due to increasing demand for its products. The client will needto obtain finance to fund the expansion.The yield curve is currently upward sloping; however, the client is worriedthat possible Federal Reserve actions to reduce inflation may result in adownturn in the economy. As the client already has floating interest-baseddebt, it is enquiring about hedging potential interest rate risk using swaps.You are required to write a short report that addresses the followingconcerns so that your manager can present it to the client:a) In what ways could the client use swaps to reduce exposure tointerest rate movements on its cost of debt? Include an explanationof any disadvantages of…
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- Lluvia Manufacturing and Paraguas Products both seek funding at the lowest possible cost. Lluvia would prefer the flexibility of floating-rate borrowing, while Paraguas wants the security of fixed-rate borrowing. Lluvia is the more creditworthy company. They face the following rate structure. Lluvia, with the better credit rating, has lower borrowing costs in both types of borrowing. Lluvia wants floating-rate debt, so it could borrow at LIBOR+1.000%. However, it could borrow fixed at 8.500% and swap for floating-rate debt. Paraguas wants fixed-rate debt, so it could borrow fixed at 12.500%. However, it could borrow floating at LIBOR+2.000% and swap for fixed-rate debt. What should they do? (LIBOR is 5.500%.) Lluvia's comparative advantage is % (round 3 decimals) Paraguas's net interest after a swap with Lluvia is (round 3 decimals) Lluvia's savings on borrowing versus net swap is (round 3 decimals) Paraguas's savings on borrowing versus net swap is (round 3 decimals)Question What is primary and secondary market? An IPO is undertaken on primary or secondary market? What is the essential job of an investment banker? Why a stock exchange is called an auction market? What are the five basis principles of finance? Your company is considering choosing one of the two projects: Project Gold and Project Diamond. Each project will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 9%. The cash flows of the two projects are provided below. Gold Diamond Cost $485 000 $520 000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 105 850 153 250 225 650 245 000 250 350 117 050 162 400 275 500 255 000 260 000 Required: Identify which project should your company accept based on Discounted Payback Period method if the payback criterion is maximum of 2.5 years.Explain why the return associated with an investment includes both the income paid by the issuer and the change in value associated with the investment. Suppose interest rates on residential mortgages of equal risk were 8 percent in California and 10 percent in New York. a.Could this differential persist? What forces might tend to equalize rates? b.Would differentials in borrowing costs for businesses of equal risk located in California and New York be more or less likely to exist than differentials in residential mortgage rates? Would differentials in the cost of money for California and New York firms be more likely to exist if the firms being compared were very large or very small? c. What are the implications of the trend for financial institutions to become large mega banking organizations and to engage in nationwide branching? Which fluctuate more, short-term or long-term interest rates? Why? Suppose a new process was developed that could be used to make oil out of seawater. The…
