EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202785
Author: DeMarzo
Publisher: VST
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Chapter 30, Problem 12P
You have been hired as a risk manager for Acorn Savings and Loan. Currently, Acorn’s
When you analyze the duration of loans, you find that the duration of the auto loans is two years, while the mortgages have a duration of seven years. Both the cash reserves and the checking and savings accounts have a zero duration. The CDs have a duration of two years and the long-term financing has a 10-year duration.
- a. What is the duration of Acorn’s equity?
- b. Suppose Acorn experiences a rash of mortgage prepayments, reducing the size of the mortgage portfolio from $150 million to $100 million, and increasing cash reserves to $100 million. What is the duration of Acorn's equity now? If interest rates are currently 4% but fall to 3%, estimate the approximate change in the value of Acorn’s equity.
- c. Suppose that after the prepayments in part (b), but before a change in interest rates, Acorn considers managing its risk by selling mortgages and/or buying 10-year Treasury STRIPS (zero-coupon bonds). How many should the firm buy or sell to eliminate its current interest rate risk?
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An investor has accumulated $4,450 and is looking for the best rate of
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Required:
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b. Calculate the net amount of return the investor would earn if $3,000
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%
Pace Electronics sells a diagnostic machine to a hospital with a four-year payment plan. The company would like to estimate the bad debt allowance needed to cover the notes outstanding over the next four years. Estimated lost cash flows and the probability of occurrence for each of the next four years are summarized in the following schedule. The risk-free rate is 3% .
Begin by computing the estimated cash flow loss each year. (Enter all amounts as positive amounts.)
Projected Cash Flow
Expected
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2023
$9,000
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%
20,000
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%
Total expected cash flow loss in 2023
2024
$15,000
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%
26,000
45
%
65,000
35
%
Total expected cash flow loss in 2024
2025
$5,000
85
%
19,000
15
%
Total expected cash flow loss in 2025…
A bank features a savings account that has an annual percentage rate of r=5.6% with interest compounded daily. Dylan deposits $2,500 into the account. The account balance can be modeled by the exponential formula S(t)=P(1+rn)nt, where S is the future value, P is the present value, r is the annual percentage rate, n is the number of times each year that the interest is compounded, and t is the time in years. What values should be used for P, r, and n? P= , r= , n= How much money will Dylan have in the account in 10 years? Answer = $ . Round answer to the nearest penny.What is the annual percentage yield (APY) for the savings account? (The APY is the actual or effective annual percentage rate which includes all compounding in the year). APY= %.
Chapter 30 Solutions
EBK CORPORATE FINANCE
Ch. 30.1 - How can insurance add value to a firm?Ch. 30.1 - Prob. 2CCCh. 30.2 - Prob. 1CCCh. 30.2 - What are the potential risks associated with...Ch. 30.3 - How can firms hedge exchange rate risk?Ch. 30.3 - Prob. 2CCCh. 30.4 - How do we calculate the duration of a portfolio?Ch. 30.4 - How do firms manage interest rate risk?Ch. 30 - The William Companies (WMB) owns and operates...Ch. 30 - Genentechs main facility is located in South San...
Ch. 30 - Prob. 3PCh. 30 - Your firm faces a 9% chance of a potential loss of...Ch. 30 - BHP Billiton is the worlds largest mining firm....Ch. 30 - Prob. 6PCh. 30 - Prob. 7PCh. 30 - Prob. 9PCh. 30 - Prob. 10PCh. 30 - Prob. 11PCh. 30 - You have been hired as a risk manager for Acorn...Ch. 30 - Prob. 13PCh. 30 - Prob. 14P
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