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Module 2 Assigned Problems 1) Calculate solutions to the following assigned problems: a) Chapter 4: Problems 1 and 3 on page 124 of the textbook. b)...

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Module 2 Assigned Problems 1) Calculate solutions to the following assigned problems: a) Chapter 4: Problems 1 and 3 on page 124 of the textbook. b) Chapter 5: Problems 3, 6, 7, and 11 on pages 164-165 of the textbook. c) Chapter 6: Problems 2, 5, 6, 11, and 19 on pages 216-219 of the textbook. Text Book: Contemporary Financial Management Course: 450 Intermediate finance a) Chapter 4: Problems 1 and 3 on page 124 of the textbook: 1.Last year, Blue Lake Mines, Inc., had earnings after tax of $650,000. Included in its expenses were depreciation of $400,000 and deferred taxes of $100,000. The company also purchased new capital equipment for $300,000 last year. Calculate Blue Lake’s after-tax cash flow for last year 3. Consider the Industrial Supply Company example (Table 4.4) again. Assume that the company plans to maintain its dividend payments at the same level in 2009 as in 2008. Also assume that all of the additional financing needed is in the form of short-term notes payable. Determine the amount of additional financing needed and pro forma financial statements (that is, balance sheet, income statement, and selected financial ratios) for 2009 under each of the following conditions Increase in Sales Increase in Expenses a. $3,750,000 $3,750,000 $3,000,000 $2,800,000 c. $4,500,000 $4,000,000 b) Chapter 5: Problems 3, 6, 7, and 11 on pages 164-165 of the textbook: 3. The Lancer Leasing Company has agreed to lease a hydraulic trencher to the Chavez Excavation Company for $20,000 a year over the next eight years. Lease payments are to be made at the beginning of each year. Assuming that Lancer invests these payments at an annual rate of 9 percent, how much will it have accumulated by the end of the eighth year? 6. A leading broker has advertised money multiplier certificates that will triple your money in nine years; that is, if you buy one for $333.33 today, it will pay you $1,000 at the end of nine years. What rate of return will you earn on these money multiplier certificates? 7. What is the present value of $800 to be received at the end of eight years, assuming the following annual interest rate? a..4 percent, discounted annually b. 8 percent, discounted annually c. 20 percent, discounted quarterly d. 0 percent 11. What would you be willing to pay for a $1,000 bond paying $70 interest at the end of each
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year and maturing in 25 years if you wanted the bond to yield the following rates of return? a. 5 percent b. 7 percent c. 12 percent ( Note: At maturity, the bond will be retired and the holder will receive $1,000 in cash. Bonds are typically issued with $1,000 face, or par, values. The actual market value at any point in time will tend to rise as interest rates fall and fall as interest rates rise.) c) Chapter 6: Problems 2, 5, 6, 11, and 19 on pages 216-219 of the textbook: 2. The return expected from Project No. 542 is 22 percent. The standard deviation of these returns is 11 percent. If returns from the project are normally distributed, what is the chance that the project will result in a rate of return above 33 percent? What is the probability that the project will result in losses (negative rates of return)? 5. You are considering investing in two securities, X and Y. The following data are available for the two securities: SecurityX SecurityY Expected return 0.10 0.07 Standard deviation of returns 0.08 0.04 Beta 0.10 0.75 a. If you invest 40 percent of your funds in Security X and 60 percent in Security Y and if the correlation of returns between X and Y is _0.5, compute the following: i. The expected return from the portfolio ii. The standard deviation of returns from the portfolio b. What happens to the expected return and standard deviation of returns of the portfolio in Part a if 70 percent of your funds are invested in Security X and 30 percent of your funds are invested in Security Y? c. What happens to the expected return and standard deviation of returns of the portfolio in Part a if the following conditions exist? i. The correlation of returns between Securities X and Y is _1.0. ii. The correlation of returns between Securities X and Y is 0. iii. The correlation of returns between Securities X and Y is _0.7. 6. You have the following information on two securities in which you have invested: Security Expected Standard Return Deviation Beta Percent Invested ( w ) Xerox 15% 4.5% 1.20 35% Kodak 12% 3.8% 0.98 65% a. Which stock is riskier in a portfolio context? Which stock is riskier if you are considering them as individual assets (not part of a portfolio)? b. Compute the expected return on the portfolio. c. If the securities have a correlation of _0.60, compute the standard deviation of the portfolio. d. Compute the beta of the portfolio.
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