The implied 1-year forward rate for default free zero coupon bonds. Introduction: Implied forward rate: Normally we come across a difference of amount between the spot interest rates and the forward interest rate. This difference can be termed as implied forward rate. Implied forward rate helps the investors to compare the returns across investments.

Question

Crenshaw, Incorporated, is considering the purchase of a $367,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method. The market value of the computer will be $67,000 in five years. The computer will replace five office employees whose combined annual salaries are $112,000. The machine will also immediately lower the firm's required net working capital by $87,000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 22 percent. The appropriate discount rate is 15 percent. Calculate the NPV of this project. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. NPV Answer is complete but not entirely correct. S 103,141.80

Answer 1

Question

Chapter 15, Problem 17PS

a.

Summary Introduction

To calculate: The implied 1-year forward rate for default free zero coupon bonds.

Introduction:

Implied forward rate: Normally we come across a difference of amount between the spot interest rates and the forward interest rate. This difference can be termed as implied forward rate. Implied forward rate helps the investors to compare the returns across investments.

b.

Summary Introduction

To calculate: The yield to maturity on 1-year zero-coupon bonds next year, assuming that pure expectations hypothesis of the term structure is correct.

Introduction:

Yield to maturity: Whenever an investment is made by the investor, he/she is entitled to earn return for holding the security or bonds till it matures. When this return is calculated in percentages, it is called yield to maturity.

c.

Summary Introduction

To calculate: The yield on 2-year zeros.

Introduction:

Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

d.

Summary Introduction

To calculate: The expected total rate of return over next year if a 2-year zero coupon bond is purchased now.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

e.

Summary Introduction

To calculate: The expected total rate of return over the next 3-year zero coupon bond.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

f.

Summary Introduction

To calculate: The current price of a 3-year maturity bond with 12% coupon rate which is paid annually.

Introduction:

Bond price: It is supposed to be the present value of a bond derived after discounting the future cash flows that are expected to be generated by a bond. It is also referred as selling price of the bond.

g.

Summary Introduction

To calculate: The total expected rate of return over the next year.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

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Crenshaw, Incorporated, is considering the purchase of a $367,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method. The market value of the computer will be $67,000 in five years. The computer will replace five office employees whose combined annual salaries are $112,000. The machine will also immediately lower the firm's required net working capital by $87,000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 22 percent. The appropriate discount rate is 15 percent. Calculate the NPV of this project. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. NPV Answer is complete but not entirely correct. S 103,141.80

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QUESTION 1 Examine the information provided below and answer the following question. (10 MARKS) The hockey stick model of start-up financing, illustrated by the diagram below, has received a lot of attention in the entrepreneurial finance literature (Cumming & Johan, 2013; Kaplan & Strömberg, 2014; Gompers & Lerner, 2020). The model is often used to describe the typical funding and growth trajectory of many startups. The model emphasizes three main stages, each of which reflects a different phase of growth, risk, and funding expectations. Entrepreneur, 3 F's Debt(banks & microfinance) Research Business angels/Angel Venture funds/Venture capitalists Merger, Acquisition Grants investors PO Public market Growth (revenue) Break even point Pide 1st round Expansion 2nd round 3rd round Research commercial idea Pre-seed Initial concept Seed Early Expansion Financial stage Late IPO Inception and prototype Figure 1. The hockey stick model of start-up financing (Lasrado & Lugmayr, 2013) REQUIRED:…

Answer 2

Question

Chapter 15, Problem 17PS

a.

Summary Introduction

To calculate: The implied 1-year forward rate for default free zero coupon bonds.

Introduction:

Implied forward rate: Normally we come across a difference of amount between the spot interest rates and the forward interest rate. This difference can be termed as implied forward rate. Implied forward rate helps the investors to compare the returns across investments.

b.

Summary Introduction

To calculate: The yield to maturity on 1-year zero-coupon bonds next year, assuming that pure expectations hypothesis of the term structure is correct.

Introduction:

Yield to maturity: Whenever an investment is made by the investor, he/she is entitled to earn return for holding the security or bonds till it matures. When this return is calculated in percentages, it is called yield to maturity.

c.

Summary Introduction

To calculate: The yield on 2-year zeros.

Introduction:

Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

d.

Summary Introduction

To calculate: The expected total rate of return over next year if a 2-year zero coupon bond is purchased now.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

e.

Summary Introduction

To calculate: The expected total rate of return over the next 3-year zero coupon bond.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

f.

Summary Introduction

To calculate: The current price of a 3-year maturity bond with 12% coupon rate which is paid annually.

Introduction:

Bond price: It is supposed to be the present value of a bond derived after discounting the future cash flows that are expected to be generated by a bond. It is also referred as selling price of the bond.

g.

Summary Introduction

To calculate: The total expected rate of return over the next year.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

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Answer 3

Question

Chapter 15, Problem 17PS

a.

Summary Introduction

To calculate: The implied 1-year forward rate for default free zero coupon bonds.

Introduction:

Implied forward rate: Normally we come across a difference of amount between the spot interest rates and the forward interest rate. This difference can be termed as implied forward rate. Implied forward rate helps the investors to compare the returns across investments.

b.

Summary Introduction

To calculate: The yield to maturity on 1-year zero-coupon bonds next year, assuming that pure expectations hypothesis of the term structure is correct.

Introduction:

Yield to maturity: Whenever an investment is made by the investor, he/she is entitled to earn return for holding the security or bonds till it matures. When this return is calculated in percentages, it is called yield to maturity.

c.

Summary Introduction

To calculate: The yield on 2-year zeros.

Introduction:

Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

d.

Summary Introduction

To calculate: The expected total rate of return over next year if a 2-year zero coupon bond is purchased now.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

e.

Summary Introduction

To calculate: The expected total rate of return over the next 3-year zero coupon bond.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

f.

Summary Introduction

To calculate: The current price of a 3-year maturity bond with 12% coupon rate which is paid annually.

Introduction:

Bond price: It is supposed to be the present value of a bond derived after discounting the future cash flows that are expected to be generated by a bond. It is also referred as selling price of the bond.

g.

Summary Introduction

To calculate: The total expected rate of return over the next year.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

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Answer 4

Question

Chapter 15, Problem 17PS

a.

Summary Introduction

To calculate: The implied 1-year forward rate for default free zero coupon bonds.

Introduction:

Implied forward rate: Normally we come across a difference of amount between the spot interest rates and the forward interest rate. This difference can be termed as implied forward rate. Implied forward rate helps the investors to compare the returns across investments.

b.

Summary Introduction

To calculate: The yield to maturity on 1-year zero-coupon bonds next year, assuming that pure expectations hypothesis of the term structure is correct.

Introduction:

Yield to maturity: Whenever an investment is made by the investor, he/she is entitled to earn return for holding the security or bonds till it matures. When this return is calculated in percentages, it is called yield to maturity.

c.

Summary Introduction

To calculate: The yield on 2-year zeros.

Introduction:

Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

d.

Summary Introduction

To calculate: The expected total rate of return over next year if a 2-year zero coupon bond is purchased now.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

e.

Summary Introduction

To calculate: The expected total rate of return over the next 3-year zero coupon bond.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

f.

Summary Introduction

To calculate: The current price of a 3-year maturity bond with 12% coupon rate which is paid annually.

Introduction:

Bond price: It is supposed to be the present value of a bond derived after discounting the future cash flows that are expected to be generated by a bond. It is also referred as selling price of the bond.

g.

Summary Introduction

To calculate: The total expected rate of return over the next year.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

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Answer 5

Chapter 15, Problem 17PS

a.

Summary Introduction

To calculate: The implied 1-year forward rate for default free zero coupon bonds.

Introduction:

Implied forward rate: Normally we come across a difference of amount between the spot interest rates and the forward interest rate. This difference can be termed as implied forward rate. Implied forward rate helps the investors to compare the returns across investments.

b.

Summary Introduction

To calculate: The yield to maturity on 1-year zero-coupon bonds next year, assuming that pure expectations hypothesis of the term structure is correct.

Introduction:

Yield to maturity: Whenever an investment is made by the investor, he/she is entitled to earn return for holding the security or bonds till it matures. When this return is calculated in percentages, it is called yield to maturity.

c.

Summary Introduction

To calculate: The yield on 2-year zeros.

Introduction:

Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

d.

Summary Introduction

To calculate: The expected total rate of return over next year if a 2-year zero coupon bond is purchased now.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

e.

Summary Introduction

To calculate: The expected total rate of return over the next 3-year zero coupon bond.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

f.

Summary Introduction

To calculate: The current price of a 3-year maturity bond with 12% coupon rate which is paid annually.

Introduction:

Bond price: It is supposed to be the present value of a bond derived after discounting the future cash flows that are expected to be generated by a bond. It is also referred as selling price of the bond.

g.

Summary Introduction

To calculate: The total expected rate of return over the next year.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

Answer 6

Chapter 15, Problem 17PS

a.

Summary Introduction

To calculate: The implied 1-year forward rate for default free zero coupon bonds.

Introduction:

Implied forward rate: Normally we come across a difference of amount between the spot interest rates and the forward interest rate. This difference can be termed as implied forward rate. Implied forward rate helps the investors to compare the returns across investments.

Answer 7

Chapter 15, Problem 17PS

a.

Summary Introduction

To calculate: The implied 1-year forward rate for default free zero coupon bonds.

Introduction:

Implied forward rate: Normally we come across a difference of amount between the spot interest rates and the forward interest rate. This difference can be termed as implied forward rate. Implied forward rate helps the investors to compare the returns across investments.

Answer 8

b.

Summary Introduction

To calculate: The yield to maturity on 1-year zero-coupon bonds next year, assuming that pure expectations hypothesis of the term structure is correct.

Introduction:

Yield to maturity: Whenever an investment is made by the investor, he/she is entitled to earn return for holding the security or bonds till it matures. When this return is calculated in percentages, it is called yield to maturity.

Answer 9

b.

Summary Introduction

To calculate: The yield to maturity on 1-year zero-coupon bonds next year, assuming that pure expectations hypothesis of the term structure is correct.

Introduction:

Yield to maturity: Whenever an investment is made by the investor, he/she is entitled to earn return for holding the security or bonds till it matures. When this return is calculated in percentages, it is called yield to maturity.

Answer 10

c.

Summary Introduction

To calculate: The yield on 2-year zeros.

Introduction:

Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

Answer 11

c.

Summary Introduction

To calculate: The yield on 2-year zeros.

Introduction:

Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

Answer 12

d.

Summary Introduction

To calculate: The expected total rate of return over next year if a 2-year zero coupon bond is purchased now.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

Answer 13

d.

Summary Introduction

To calculate: The expected total rate of return over next year if a 2-year zero coupon bond is purchased now.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

Answer 14

e.

Summary Introduction

To calculate: The expected total rate of return over the next 3-year zero coupon bond.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

Answer 15

e.

Summary Introduction

To calculate: The expected total rate of return over the next 3-year zero coupon bond.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

Answer 16

f.

Summary Introduction

To calculate: The current price of a 3-year maturity bond with 12% coupon rate which is paid annually.

Introduction:

Bond price: It is supposed to be the present value of a bond derived after discounting the future cash flows that are expected to be generated by a bond. It is also referred as selling price of the bond.

Answer 17

f.

Summary Introduction

To calculate: The current price of a 3-year maturity bond with 12% coupon rate which is paid annually.

Introduction:

Bond price: It is supposed to be the present value of a bond derived after discounting the future cash flows that are expected to be generated by a bond. It is also referred as selling price of the bond.

Answer 18

g.

Summary Introduction

To calculate: The total expected rate of return over the next year.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

Answer 19

g.

Summary Introduction

To calculate: The total expected rate of return over the next year.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

Answer 20

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Ch. 15 - Prob. 1PS Ch. 15 - Prob. 2PS Ch. 15 - Prob. 3PS Ch. 15 - Prob. 4PS Ch. 15 - Prob. 5PS Ch. 15 - Prob. 6PS Ch. 15 - Prob. 7PS Ch. 15 - Prob. 8PS Ch. 15 - Prob. 9PS Ch. 15 - Prob. 10PS

Solution Summary: The author calculates the implied 1-year forward rate for default free zero coupon bonds, assuming the expectations hypothesis of the term structure is correct.

To calculate: The yield on 2-year zeros.

Introduction:

Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

To calculate: The expected total rate of return over the next 3-year zero coupon bond.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

Chapter 15 Solutions

Solution Summary: The author calculates the implied 1-year forward rate for default free zero coupon bonds, assuming the expectations hypothesis of the term structure is correct.

To calculate: The yield on 2-year zeros. Introduction: Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

To calculate: The expected total rate of return over the next 3-year zero coupon bond. Introduction: Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

Chapter 15 Solutions

To calculate: The yield on 2-year zeros.

Introduction:

Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

To calculate: The expected total rate of return over the next 3-year zero coupon bond.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.