Solved: 1. Barney Gumble Is Taking into consideration Obtaining A New Snowp…


1. Barney Gumble is contemplating obtaining a new snowplow. The plow fees $20,000. With the plow, Barncy cxpccts to clcar $five,000 per ycar for six ycars. At the finish of that pcriod, the plow ill havc cndcd its helpful life and have no salvage worth Industry interest prices are six.% a. What is thc prescnt valuc of thc money flows Barncy cxpects to reccivc from this projcct? b. Must he pursue this project? Briefly clarify two. Your initial activity in your new job at an investment bank is to price tag a new stock challenge. You count on the stock will spend a dividend of $two per share beginning 1 year just after challenge and that dividends will develop at three.% per year thereafter. The return on related stocks is five.five% a. What price tag would you assign to the stock? b. How considerably do you count on the price tag of the stock will enhance through the initial ycar? three. A faculty member in Art History discovers you are taking Monetary Economics and hires you to establish whether or not it would make sense for him to refinance his mortgage. (Know-how acquired in Monctary Economics pays off promptly.) Thc faculty mcmbcr not too long ago took out a $250,000 20-ycar fixed price mortgage to finance a household buy with a four.five% interest price and annual payments. Interest prices on 20-year fixed price mortgages have due to the fact declined to four.% What are the annual payments on the existing four.five% mortgage? b. What would be the annual payments on a four.% mortgage? c. If thc price of refinancing is S6,000, is it worthwhilc to refinancc to gct thc lowcr price? (If the mortgage is refinanced, the proceeds from a new four.% mortgage will be employed to repay the original four.five% mortgage Assume the faculty member plans to reside in the home for at least 20 years and does not strategy to spend the mortgagc off carly.) four. The yield to maturity on l-year zero-coupon bonds is presently 7%, the YTM on two-year zeros is eight%. The Government plans to issuc a two-ycar maturity coupon bond, paying coupons oncc per ycar with a coupon price of 9%. The face worth of the bond is $100 a. At what price tag will the bond scll? b. What will the yield to maturity on the bond be? (Hint: Use a economic calculator to get the YTM) c. If the expectations theory of the yield curve is appropriate, what is the market place expectation of the price tag that the bond will sell for subsequent year? d·Recalculate your answer to (c) ifyou belicve in the liquidity preferencc theory and you think that the liquidity premium is 1%

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