EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202778
Author: DeMarzo
Publisher: PEARSON CUSTOM PUB.(CONSIGNMENT)
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Chapter 25, Problem 2P
Suppose the risk-free interest rate is 5% APR with monthly compounding. If a $2 million MRI machine can be leased for seven years for $22,000 per month, what residual value must the lessor recover to break even in a perfect market with no risk?
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What is the no arbitrage price of a risk-free investment that promises to pay $1,000 in one year? The risk-free interest rate is 3.5%. If you can purchase the investment for $950, do you have an arbitrage opportunity?
You are offered a four-year investment opportunity costing $450,000 today. The investment will pay $115,500 in the first year, $136,500 in the
second year, $159,250 in the third year, and $180,250 in the fourth year,. Investments of comparable risk require a 14% rate of return in the
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OA. No, because the investment's net present value is negative.
OB. No, because the investment's net present value is zero.
OC. Yes, because the investment's cash payments represent a total return of 31% on the $450,000 investment.
OD. Yes, those cash payments look good to me because they add up to $591,500 which is more than the $450,000 investment.
OE. Yes, because the investment's net present value is greater than zero.
Suppose the risk-free interest rate is 4.6%.
Having $600 today is equivalent to having what amount in one year? (Round to the nearestcent.)
Having $600 in one year is equivalent to having what amount today? (Round to the nearestcent.)
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Chapter 25 Solutions
EBK CORPORATE FINANCE
Ch. 25.1 - In a perfect capital market, how is the amount of...Ch. 25.1 - Prob. 2CCCh. 25.2 - Prob. 1CCCh. 25.2 - Is it possible for a lease to be treated as an...Ch. 25.3 - Why is it inappropriate to compare leasing to...Ch. 25.3 - Prob. 2CCCh. 25.3 - Prob. 3CCCh. 25.4 - Prob. 1CCCh. 25.4 - Prob. 2CCCh. 25 - Suppose an H1200 supercomputer has a cost of...
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- You currently have $50,000 in cash. You have access to a project which requires an initial investment of $50,000. One year from now this project will pay either $40,000 with a probability 50% or $100,000 with probability 50%. After this, there are no further cash flows. Assume risk neutrality and an annual discount rate of 10%. This is also the risk-free rate. (d) You have found investors who will give you a loan for the full cost of the project. You will invest your cash at a risk-free rate. Assume in case of default, these investors can claim all of the project's cash flows, but cannot claim the cash you have invested outside of the project. What is the face value of the loan and the interest rate? How much money do you expect to have one year from now? (e) In light of your numerical answers above, discuss Modigliani and Miller's 1st proposition.arrow_forwardYou are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT? a. The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. b. The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE. c. The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD. d. The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD. e. If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.arrow_forward10) Which of the following two options for purchasing an equipment has a lower net present cost? Assume a discount rate of 0.05. (Hint: Use Excel for easier calculations.) a. Initial payment of $2000, then $550 monthly for4 months. b. Initial payment of $3000, then $200 monthly for 5 months. 11) Why should a higher discount rate be applied to an investment with a higher risk?arrow_forward
- A new investment offers TimeTek future cash flows of $Q in six years and SP in 12 years. Assuming a negative interest rate of throughout the entire time, TimeTek will pay up to $50,000 today to receive these future cash flows. If the interest rate becomes zero (r=0%), what will TimeTek be willing to pay for these same cash flows $Q and SP? O Less than $50,000 O $50,000 O Not enough information to determine More than 50,000arrow_forwardProject A requires an investment of 1 million today and pays out 5 million in expectation next years. Project B requires an investment of $10 million today and pays out $ 20 million in expectation next year. Project B has high idiosyncratic risk and no systematic risk, while Project A is risk free. The two projects are mutually exclusive. Assume the risk free rate is if >0%, Given these assumptions. Project A has a higher NPV than Project B.arrow_forwardSuppose that a risk-free investment will make three future payments of $100 in one year, $100 in two years, and $100 in three years. If the Federal Reserve has set the risk-free interest rate at 8 percent, what is the proper current price of this investment? What if the Federal Reserve raises the riskfree interest rate to 10 percent?arrow_forward
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