Answer:
The question is missing the options which are below:
A Real risk-free rate differences.
B Tax effects.
C Default risk differences.
D Maturity risk differences.
E Inflation differences.
The correct answer is option C,default risk differences.
Explanation:
Default risk is the increase in return given to an investor to compensate the investor for the likely losses that may arise due to the inability of the borrower to make funds available to the investor on the maturity date or even in required amount.
Different debt instruments have different default risk depending on their credit rating as rated by international rating agencies.Such rating is a function of many factors,which includes:
Balance sheet position
Profitability
Liquidity strength of the company
Macro-economic factors and some others.
Liquidity refers to the ability of the company to settle obligations such as repayment of bonds and interest when due.
Invariably,liquidity has a higher impact in determining credit rating as well as default risk of an instrument.
Answer:
arithmetic average growth rate = (4% + 3.37% + 5.12% + 3.1%) / 4 = 3.9%
we need to find the required rate or return (RRR) in the following formula:
stock price = expected dividend / (RRR - growth rate)
- expected dividend = $2.33 x 1.039 = $2.42
- stock price = $55
- growth rate = 0.039
55 = 2.42 / (RRR - 0.039)
RRR - 0.039 = 2.42 / 55 = 0.044
RRR = 0.083 = 8.3%
geometric average growth rate = [(1.04 x 1.0337 x 1.0512 x 1.031)¹/⁴] - 1 = 3.89%
again we need to find the required rate or return (RRR) in the following formula:
stock price = expected dividend / (RRR - growth rate)
- expected dividend = $2.33 x 1.0389 = $2.42
- stock price = $55
- growth rate = 0.0389
55 = 2.42 / (RRR - 0.0389)
RRR - 0.0389 = 2.42 / 55 = 0.044
RRR = 0.0829 = 8.29%
Explanation:
It is given that in the market there are four equal-sized firms that produce similar products. The market is saturated such that 10% industry-wide price rise would lead to 18% decline in units sold by all firms in the industry. Going further, there is a proposed legislation that imposes a tariff on a key input used by the industry, which on realization would result in the increase in marginal cost by $2.
This means that the market elasticity of demand is:
[ FIND THE ATTACHMENT FOR SOLUTION]
A and D are the correct answers . You are welcome .
Answer:
NPV = $1.49 million
Explanation:
<em>The NPV is the difference between the PV of cash inflows and the PV of cash outflows. A positive NPV implies a good investment decision and a negative figure implies the opposite. </em>
<em>NPV of an investment: </em>
NPV = PV of Cash inflows - PV of cash outflow
But we will need to work out the discount rate to be used for discounting the cash flows. Hence, we need to determine the cost of capital as follows:
Step 1: After-tax cost of debt
After tax cost of debt = pre-tax cost of debt × (1-tax rate rate)
= 9%× (1--0.3)=6.3%
Step 2 : Weighted Average cost of capital (WACC)
WACC=( 0.25×6.3%) + (0.75× 13%) =11.325
%
Step 3:Net Present Value (NPV)
PV of cash inflow= (1- (1.11325^-5)/0.11325)× 13.5 = 49.49 million
Initial cost = $48 million
NPV = 49.49 million - $48 million =$1.49 million
NPV = $1.49 million
