Required a assume e coli is sure to pay the second

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States government securities maturing in one year yield 7 percent. Required a. Assume E. Coli is sure to pay the second $30,000 installment. Should you take its offer or start on the office building? Explain. b. Suppose you are not sure E. Coli will pay. You observe that other investors demand a 10 percent return on their loans to E. Coli. Assume that the other investors have
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correctly assessed the risks that E. Coli will not be able to pay. Should you accept E. Coli’s offer? QUESTION 10 (BM-28) Norman Gerrymander has just received a $2 million bequest. How should he invest it? There are four immediate alternatives. Required a. Investment in one-year U.S. government securities yielding 5 percent. b. A loan to Norman’s nephew Gerald, who has for years aspired to open a big Cajun restaurant in Duluth. Gerald had arranged a one-year bank loan for $900,000, at 10 percent, but asks for a loan from Norman at 7 percent. c. Investment in the stock market. The expected rate of return is 12 percent. d. Investment in local real estate, which Norman judges is about as risky as the stock market. The opportunity at hand would cost $1 million and is forecasted to be worth $1.1 million after one year. Which of these investments have positive NPVs? Which would you advise Norman to take? e. Suppose a bank offers Norman a $600,000 personal loan at 8 percent. (Norman is a long-time customer of the bank and has an excellent credit history.) Suppose Norman borrows the money, invests $1 million in real estate opportunity (d) and puts the rest of his money in opportunity (c), the stock market. Is this a smart move? Explain. QUESTION 11 (BM-28) Comment on the following a. “My company’s cost of capital is the rate we pay to the bank when we borrow money.” b. “Net present value is just theory. It has no practical relevance. We maximize profits. That’s what shareholders really want.” c. “It’s no good just telling me to maximize my stock price. I can easily take a short view and maximize today’s price. What I would prefer is to keep it on a gently rising trend.” QUESTION 12 (BM-51)
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Solve the following a. The cost of a new automobile is $10,000. If the interest rate is 5 percent, how much would you have to set aside now to provide this sum in five years? b. You have to pay $12,000 a year in school fees at the end of each of the next six years. If the interest rate is 8 percent, how much do you need to set aside today to cover these bills? c. You have invested $60,476 at 8 percent. After paying the above school fees, how much would remain at the end of the six years? QUESTION 13 (BM-52) Halcyon Lines is considering the purchase of a new bulk carrier for $8 million. The forecasted revenues are $5 million a year and operating costs are $4 million. A major refit costing $2 million will be required after both the fifth and tenth years. After 15 years, the ship is expected to be sold for scrap at $1.5 million. If the discount rate is 8 percent, what is the ship’s NPV?
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