Plymouth plc wishes to borrow £80 million at a fixed interest rate to fund a project. The firm would pay a fixed rate of 6% p.a., but can alternatively borrow with a floating rate LIBOR+3% p.a. Truro plc is currently looking to borrow £80 million for a project with a floating interest rate. The company would pay a floating rate of LIBOR+2.4% p.a., but can alternatively borrow with a fixed rate of 5% p.a. The two companies decide to enter a swap in which the benefit is shared equally. In the agreement, Plymouth plc's swap payment to Truro plc is to be 5% p.a. Which of the following statements about the swap agreement is most likely to be true? A Plymouth plc receives LIBOR+1.2% p.a. from Truro plc Truro plc's net borrowing cost is LIBOR+3.2% p.a. Truro plc borrows £80m loan from its bank at a floating rate of LIBOR+3% p.a. D в Plymouth plc's net borrowing cost is 5.8% p.a. Each company can save 0.4% p.a., benefiting equally from the swap E

Plymouth plc wishes to borrow £80 million at a fixed interest rate to fund a project. The firm would pay a fixed rate of 6% p.a., but can alternatively borrow with a floating rate LIBOR+3% p.a. Truro plc is currently looking to borrow £80 million for a project with a floating interest rate. The company would pay a floating rate of LIBOR+2.4% p.a., but can alternatively borrow with a fixed rate of 5% p.a. The two companies decide to enter a swap in which the benefit is shared equally. In the agreement, Plymouth plc's swap payment to Truro plc is to be 5% p.a. Which of the following statements about the swap agreement is most likely to be true? A Plymouth plc receives LIBOR+1.2% p.a. from Truro plc Truro plc's net borrowing cost is LIBOR+3.2% p.a. Truro plc borrows £80m loan from its bank at a floating rate of LIBOR+3% p.a. D в Plymouth plc's net borrowing cost is 5.8% p.a. Each company can save 0.4% p.a., benefiting equally from the swap E

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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Similar questions

Advance Inc. is considering investing £10 million on a project. It is expected that the project willgenerate annual cash inflows of 1.5 million in perpetuity. The corporate’s opportunity cost of capitalfor this project is 12%.a) Demonstrate the net present value (NPV) approach to evaluate whether to invest in thisproject.b) Demonstrate the internal rate of return (IRR) approach to evaluate whether to invest in thisproject.c) Which approach should be adopted when NPV and IRR generates conflicting results, andwhy?
Co. has an investment opportunity (Project B) that requires a cash outlay of $18,000 today. They estimate that they will receive in exchange $6,200 in year 1, $6,500 in year 2, and $8,200 in year 3. Our Co 10. Marvelous me a) What are the IRR and the NPV of Project B? b) If the discount rate is 10%, would you invest in Project B? c) Let's imagine that we had a second project (Project B) that has an IRR of 18%. If the crossover rate between these two projects is 13%, which project would you choose when the appropriate discount rate is below that crossover rate?
Project A has an internal rate of return of 10%. Project B costs £100 this year and will generate a cash flow of £105 next year. The two projects are not mutually exclusive. 1. The company should only undertake project A 2. If the appropriate discount rate is below 10%, the company should invest in both projects 3. If the appropriate discount rate is above 5% the company should invest in both projects 4. If the appropriate discount rate is above 5%, the company should not undertake project B
A company is considering an investment project in Canada which has an initial cost of CAD5,785,000. The project is expected to return a one-time payment of CAD7,430,000 two years from now. The risk-free rate of return is 1.6 percent in the U.S. and 1.9 percent in Canada. The inflation rate is 1.5 percent in the U.S. and 1.8 percent in Canada. Currently, you can buy CAD 124.20 for $100. How much will the payment two years from now be worth in U.S. dollars? $5,917,265 $5,956,317 $5,927,028 $5,946,554 $5,936,791
A Ghanaian multinational firm has two options in sourcing funds. The first option is to raise cedi on the local financial market at 25% per annum. The second option is to borrow dollars from a US bank at 6% per annum, convert it into cedi and pay the loan in one year. Assuming that the dollar assuming the dollar appreciates by 15% against the cedi by the end of the year when the loan is due, calculate which of the two options is cheaper.
You are considering a geographic expansion into the European market for Canopy Pharmaceuticals. Below are the incremental cash flows for the Canopy project for you to use in your analysis. Assume Canopy's marginal tax rate is 35%, their cost of capital is 15.7 %, and an expected growth rate of 5% after 2003. Calculate the NPV, IRR, Payback Period. Explain how do you determining the initial cost and the terminal value? (Using Gordon Model to find the terminal)
Suppose that some commercial bank has $100M in deposits and $20M in capital. Assuming a 10% minimum reserve ratio, what is the maximum amount of loans and securities this bank can own? (exclude inter-bank loans as a possibility for this question)
You are evaluating a project that requires an investment of $102 today and garantees a single cash flow of $127 one year from now. You decide to use 100% debt financing, that is, you will borrow $102. The risk-free rate is 5% and the tax rate is 39%. Assume that the investment is fully depreciated at the end of the year, so without leverage you would owe taxes on the difference between the project cash flow and the investment, that is, $25. Calculate the NPV of this investment opportunity using the APV method. (Round to two decimalplaces.) Using your answer to part (1), calculate the WACC of the project. (Round to two decimalplaces.) Verify that you get the same answer using the WACC method to calculate NPV. (Round to two decimalplaces.) Finally, show that flow-to-equity method also correctly gives the NPV of this investment opportunity. (Round to two decimalplaces.)
The IBC Company is considering undertaking an investment that promises the following cash flows: Period 0 is = -$100 Period 1 is =$80 Period 2 is = $80 If the company waits a year, it can make the following investment: Period 1 is = -2 $220 Period = $280 Assume a time value of 0.10. Which investment should the firm undertake? Use both the net present value and IRR approaches. With the IRR method, use incremental cash flows.
AB Borda shall establish a risk-adjusted required rate of return as part of their investment analysis. The company has produced the following information: • The investment will be financed to 40% with bank loans and 60% with equity • The company's tax rate is 22% • The government bond for the intended investment period has an interest rate corresponding to 2% • The company has negotiated with the bank for a loan for the investment with an interest rate of 5%. • For the investment period, the company has an expectation that the index for the market portfolio will increase from the current 110 to 119.9 at the end of the investment period. • The company's intended investment has a covariance with a market portfolio of 120 and that the standard deviation for the market portfolio is 7.56. a) Calculate the company's nationally adjusted return requirement for the investment.
WhiteScreen LLC is evaluating Project T, which requires an initial investment of RO 18000. The expected net cash flows are RO 5000 pa for four years at today’s prices. However, these are expected to rise by 5.5% pa because of inflation. The firm’s cost of capital is 15%. What is the NPV for Project T being evaluated by WhiteScreen LLC using the discounting real cash flows? -1802 -2803 2500 14792
12. The ABC Company is considering undertaking an investment that promises to have the following cash flows: period 0, −$50; period 1, $90. If the firm waits a year, it can invest in an alternative (that is, mutually exclusive) investment that promises to pay −$60 in period 1 and $100 in period 2. Assume a time value of money of 0.05. Which investment should the firm undertake? Use the net present value and the internal rate of return methods.

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