1. Suppose the spot change rate is $ per Yen is .008996 and the 1-year forward exchange rate is .009221. If the interest rate in the US is 4.5% What should be the interest rate in Japan according to covered interest parity?
2. vAssume that you are an intern with the Bezos Rocket Company, and you have collected the following data: The yield on the company's outstanding bonds is 8.75%; its tax rate is 40%; the next expected dividend is $0.65 a share; the dividend is expected to grow at a constant rate of 4.00% a year; the price of the stock is $15.00 per share; the flotation cost for selling new shares is F = 10%; and the target capital structure is 45% debt and 55% common equity. What is the firm's weighted average cost of capital (WACC), assuming it must issue new stock to finance its capital budget?
A. 7.08% B. 8.89% C. 7.21% D. 8.04%
3. The Lagos Leather Corporation is considering replacing the drill press that it currently uses to manufacture handbags. The drill press, purchased just 2 years ago, is being depreciated on a straight-line basis and has 6 years of remaining life. Its current book value is $1,800, and it could be sold on an Internet auction site for $4,500 at this time. The annual depreciation expense on the press will be $300 per year for the remaining 6 years of its life. If the old press is not replaced, it will have a salvage value of $800 at the end of its useful life.
Lagos is considering purchasing a new higher-end drill press, which costs $7,900, and has an estimated useful life of 6 years with an estimated salvage value of $800. This drill press falls into the MACRS 5-years class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new drill press is faster and would allow for an output expansion, so sales would rise by $2,000 per year; even so, the new machine's much greater efficiency would reduce operating expenses by $1,400 per year. To support the greater sales, the new drill press would require that inventories increase by $2,900, but accounts payable would simultaneously increase by $700. Lagos’s marginal federal-plus-statetax rate is 40%, and its WACC is 13%.
What is the initial investment outlay?
$5,480
$6,880
$8,880
$10,280