1. (25 points) - Nominal annual interest rate: 1.5% x 12 = 18%
- Effective interest rate: (1+r) ^m - 1 = (1+0.015)^12 -1 = 19.56%
2. - Typical Yield Curve (10 points)
- Antitrust Law Suit. (5 points)
- Company A: Low P/E ratio indicates that its current STOCK PRICE is cheap from the perspective of its CURRENT earnings. However, its high PEG ratio indicates that this company has a low growth rate which makes the stock less attractive from the perspective of "Future" earnings.
Company B: High P/E ratio indicates that its current STOCK PRICE seems to be a bit expensive from the perspective of its CURRENT earnings. However, its low PEG ratio indicates that this company is growing rapidly which makes the stock more attractive if future earnings is considered. (10 points)
3. (25 points) Alternative A (reduce-sized): PV = $100M + $150M (P/F, 6%, 20) = $146.77M Alternative B (full size): PV = $200M Pick alternative A 4. (25 points) | | A | B | B-A | | Initial Cost | 300,000 | 950,000 | 650,000 | | Annual Benefit | 125,000 | 190,000 | 65,000 |
**You need to solve this problem on the basis of incremental rate of return. MARR = 5% PW of cost = PW of benefits 650,000 = 65,000(P/A, i, 15%) (P/A, i, 15) = 10, Solve i, if i > 5% (MARR) then go with option B, otherwise go with option A. (P/A, 5%, 15) = 10.380, (P/A, 6%, 15) = 9.712, i is somewhere between 5% ~ 6%. **You need to explain what is the "i" here and how does it do with the MARR to get full credits. |
