EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202785
Author: DeMarzo
Publisher: VST
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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?
Do the following present value problems. You must set up all present value problems before calculation. Merely writing down the answer (even if it is correct) is an automatic zero. You must show your work.a. Suppose we have a four year fixed-payment loan with $900 payments made at the end of each year. Given a market interest rate of 7 percent, how much was initially borrowed?b. Suppose you were considering purchasing a $6300 machine today that would generate additionalnet profit of $2500 booked at the end of each year. Assuming you need a 10 percent annual return to justify the investment, would the investment be worth doing if you had only three years of payouts? Would your answer change if you only needed a 9 percent annual return on your
investment ? Why or why not? You must use present value to demonstrate your answer, and show your work.c. Consider two zero coupon bonds in which you receive $100 at the maturity date, one maturing in 3 years and one maturing in 5 years.…
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.)
Which would you prefer, $600 today or $600 in one year? Does your answer depend on when you need the money? Why or why not? (Round to the nearestcent.)
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 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_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
- You are researching interest rates and their forecasts. Your research provides you with the following: 1-year rate = 6% 2-year rate = 6.125% 3-year rate = 8.5% 1-year rate, 2 years from now = 6.5% Assuming you can borrow $1 million, can you use this interest rate information to earn some risk-free profit. if yes, compute the profit. Show detailed workings. Assume that the pure expectations theory applies.arrow_forwardA project has two possible outcomes. The good outcome returns $9,000 next year and occurs 59% of the time. The bad outcome is total failure, retuming $0 , the rest of the time. If the risk free interest rate is 3.2% , the expected market return is 12.6% , and the project beta is 1.1 , what is the price of the project today?arrow_forwardSuppose Niles plans to invest $1,000. He can earn an effective annual rate of 6% on Security A, while Security B has an effective annual rate of 12%. The time taken to double the value of investment under Security B should be exactly half the time taken to double the value of investment under Security A. Group of answer choices True Falsearrow_forward
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