Quantitative Finance and Financial Markets
1. As an analyst covering the RAD Corporation, you are evaluating its research and developments (R&D) program for the current year. Management has announced that it intends to invest $1 million in R&D. Incremental net cash flows are forecasted to be $150,000 per year in perpetuity. RAD corporation's opportunity cost of capital is 10 percent. (a) State whether RAD's R&D program will benefit shareholders, as judged by the NPV rule. (b) Evaluate whether your answer to Part 1 changes if RAD Corporation's opportunity cost of capital is 15 percent rather than 10 percent.
2. As an analyst covering the RAD Corporation, you are evaluating its research and developments (R&D) program for the current year. Management has announced that it intends to invest $1 million in R&D. Incremental net cash flows are forecasted to be $150,000 per year in perpetuity. RAD corporation's opportunity cost of capital is 10 percent. (a) Write the equation determining the internal rate of return of the R&D program. (b) Calculate the IRR.
3. Suppose a T-Bill with a face value (or par value) of $100,000 and 150 days until maturity is selling for $98,000. What is the bank discount yield?
4. You need to find the present value of a cash flow of $1,000 that is to be received in 150 days. You decide to look at a T-bill maturing in 150 days to determine the relevant interest rate for calculating the present value. You have found a variety of yields for the 150-day bill. Following table presents this information: Short- Term Money Market Yields Holding period yield 2.0408% Bank discount yield 4.8% Money market yield 4.898% Effective annual yield
5. 0388% Which yields are appropriate for finding the present value of the $1,000 to be received in 150 days?