Assume gold price risk is diversifiable, and the riskless rate is 5%. A firm produces a unit of gold a year from today. Assume all interest is compounded annually and is tax deductible. The price of gold is either $500 or $189, with probability p and 1-p, respectively. Suppose the firm pays taxes at a rate of 40% for all its cash flow in excess of $300. The value of the firm is the expected discounted value of its cash flow less the expected discounted value of bankruptcy costs and taxes that it pays. The firm can hedge by buying/selling forward contracts on gold. Assume that bankruptcy costs are zero. When p = 0.4, Find the value of unhedged unlevered firm.

Assume gold price risk is diversifiable, and the riskless rate is 5%. A firm produces a unit of gold a year from today. Assume all interest is compounded annually and is tax deductible. The price of gold is either $500 or $189, with probability p and 1-p, respectively. Suppose the firm pays taxes at a rate of 40% for all its cash flow in excess of $300. The value of the firm is the expected discounted value of its cash flow less the expected discounted value of bankruptcy costs and taxes that it pays. The firm can hedge by buying/selling forward contracts on gold. Assume that bankruptcy costs are zero. When p = 0.4, Find the value of unhedged unlevered firm.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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You invest in a company which expects to pay you the following amounts in return each year. Year 1: $1,100, Year 2: $2,100, Year 3: $1,600, Year 4: $2,100, and Year 5 $1,500. If an annual interest rate is 5 percent, what is the present value of this uneven cash flow stream? $7,883 $7,807 $7,563 $7,237
Your consulting firm will produce cash flows of $190,000 this year, and you expect cash flows thereafter to keep pace with any increase in the general level of prices. The interest rate currently is 5.2%, and you anticipate inflation of about 1.2%. a. What is the present value of your firm's cash flows for years 1 through 5? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Present value b. How would your answer to (a) change if you anticipated no growth in cash flow? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Present value
Your consulting firm will produce cash flows of $145,000 this year, and you expect cash flows thereafter to keep pace with any increase in the general level of prices. The interest rate currently is 6.9%, and you anticipate inflation of about 2.9%. a. What is the present value of your firm's cash flows for years 1 through 5? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Present value $ Present value 279,013.75 b. How would your answer to (a) change if you anticipated no growth in cash flow? Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
Create a cashflow diagram/table and provide complete solution. The inflation rate in a Central American country is 6% per year. What real rate of return will an investor make on a $100,000 investment in a copper mine stock that yields an overall internal rate of return of 28% per year?
Hollywood Shoes would like to maintain their cash account at a minimum level of $67,000, but expect the standard deviation in net daily cash flows to be $5,700; the effective annual rate on marketable securities to be 6.50 percent per year; and the trading cost per sale or purchase of marketable securities to be $270 per transaction. What will be their optimal cash return point? (Round your answer to 2 decimal places.)
National Co. would like to maintain its cash account at a minimum level of P25,000, but expect the standard deviation in net daily cash flows to be P2,000; the effective annual rate on marketable securities to be 7.5% per year, and the trading cost per sale or purchase of marketable securities to be P200 per transaction. What will be their optimal cash return point?
Suppose the current price of gold is $1,240 an ounce. Hotshot Consultants advises you that gold prices will increase at an average rate of 14% for the next two years. After that the growth rate will fall to a long-run trend of 2% per year. Assume that gold prices have a beta of O and that the risk-free rate is 6%. What is the present value of 1.2 million ounces of gold produced in 10 years? (Do not round intermediate calculations. Enter your answer in billions rounded to 2 decimal places.) Present value billion
Suppose the current price of gold is $1,300 an ounce. Hotshot Consultants advises you that gold prices will increase at an average rate of 12% for the next two years. After that the growth rate will fall to a long-run trend of 4% per year. Assume that gold prices have a beta of 0 and that the risk-free rate is 5.5%. What is the present value of 1.5 million ounces of gold produced in 8 years? (Do not round intermediate calculations. Enter your answer in billions rounded to 2 decimal places.)
A firm expects to make payments of 1.1, 1.5, 1.2, 1.4 and 1.9 million for a particular supply over each of the next 5 years. What constant annual payment is this equivalent to if the annual rate is 10%? That is, what is the time-value weighted average of this mixed-cash flow stream?
Assuming a 1-year, money market account investment at 2.51 percent (APY), a 1.1% inflation rate, a 25 percent marginal tax bracket, and a constant $40,000 balance, calculate the after-tax rate of return, the real return, and the total monetary return. What are the implications of this result for cash management decisions?
On the London Metals Exchange, the price for copper to be delivered in one year is $5,820 a ton. (Note: Payment is made when the copper is delivered.) The risk-free interest rate is 2.00% and the expected market return is 8%. a. Suppose that you expect to produce and sell 10,000 tons of copper next year. What is the PV of this output? Assume that the sale occurs at the end of the year. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) b-1. If copper has a beta of 1.28, what is the expected price of copper at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b-2. Assume copper has a beta of 1.28. What is the certainty-equivalent end-of-year price?
Suppose SBD Bank has RSA of $150m and RSL of $140m. If interest rates rise by 1 percent on both RSAs and RSLs, what would be the expected annual change in net interest income (ΔNII) based on $GAP? Show your work. ( How a commercial bank’s value would be affected by an increase in economic growth?

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