In this case Bond Issuers look at outstanding bonds of comparable maturity and risk. The yields on such bonds are used to create the coupon rate essential for an exacting issue to initially sell at par. Bond issuers also basically ask possible purchasers what coupon rate would be necessary to attract them. The required return is what investors actually demand on the issue, and it will change through time. The difference between coupon rate and required return are equal only if the bond sells for exactly par.
a. Adjusted trial balance b. Comparative balance sheets c. Current income statement d. Additional information 4. The primary purpose of the statement of cash flows is to a. provide information about the investing and financing activities during a period. b. prove that revenues exceed expenses if there is a net income.
Short-run cost functions should be estimated using data for which the level of usage of one or more of the inputs is fixed. Usually time-series data for a specific firm are used to estimate short-run cost functions. Analysts should be careful to adjust the cost and input price data (which are measured in dollars) for inflation and to make sure the cost data measure economic cost. The following are the two possible problems that may arise when measuring cost for short-run cost estimation: Correcting data for the effects of inflation Economic analyses often use data from two or more calendar years. Price inflation causes the value of a dollar to fall over time, and so the same dollar amount in two different years will usually represent different amounts of purchasing power.
YTM call = YTM non callable + risk premium Determined by ability of being called, and how much of risk. It would cost to create the synthetic bond $ 98.783. Ask ( Price at which Issuer / Dealer is willing to sell the bond for. Bid ( Price at which Issuer/Dealer is willing to buy the bond. | | | | | | | | | |Treasury Bonds | | | | | | | | |Ask |Bid |Coupon | | | |81/4 May 00-05 |101.25 |101.125 |4.125 | | | |12-May-05 | |129.9063 |129.7188 |6 | | | |8 7/8 May 00 |104.5 |104.375 |4.4375 | | | | | | | | | | | |STRIPS | | | | | | | | | | | |
The RRR can also be called as the discount rate, hurdle rate or the opportunity cost of capital. NPV takes into account the principle in economics referred to as the “time value of money” which implies that a dollar earned today is more valuable than a dollar earned tomorrow. It is to be noted that projects with zero or positive NPV are acceptable to a company from a financial viewpoint as the return from these projects equals or exceeds the cost of capital. Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. IRR represents the discount rate at which the present value of the expected cash inflows from a project equals the present value of the expected cash outflows.
Case study: Costaguana Question 1 The question if the peso has fallen enough can be answered by looking at consumer prices in the United States and Costaguna and applying their differences to the purchasing power parity theory (PPP) so as to calculate expected future currency exchange rate. Purchasing power parity theory (PPP) states that exchange rates between currencies will change to the differentials in price changes between countries. Therefore, exchange rate movements would be offset by the change in prices (Midura, 2009). The consumer price movements in the US and Costaguana over the years can be seen in the above table. Putting price differences into the PPP equation we can calculate the expected spot rate for peso for 2005: St20 = (180/50)(140/70) St20 = 1.8 St = 36 PPP rate for peso in 2005 is 36/$.
REAL OPTIONS AND THEIR INCORPORATION WITHIN CAPITAL BUDGETING A real option is a form of derivative, similar to a forward contract, but with a couple of important differences. A real option infers the right, but not an obligation, to buy an underlying real asset. The holder of a real option will compare the market value of the asset in question, along with the agreed exchange value on the option and can then decide whether to exercise that option or tear it up. This flexibility can come at considerable cost, which we will examine in the next section. The process of capital budgeting focuses on the incremental increase in cash flows associated with an investment decision or investment project.
Usually a discount of 10 percent to 40 percent is applied to private companies due to the lack of liquidity of their shares. Precedents/acquisition comps: At what metrics (same as above) were similar companies acquired? Discounted cash flow (“DCF”): Based on the concept that value of the company equals the cash flows the company can produce in the future. An appropriate discount rate is used to calculate a net present value of projected cash flows. Leveraged Buyout (“LBO”): Assuming an IRR (usually 20 percent to 30 percent), what would a financial buyer be willing to pay?
Popular methods of capital budgeting include net present value (NPV), internal rate of return (IRR), discounted cash flow (DCF) and payback period. NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, is should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative. Pros of NPV 1) Accounts or the fact that the value of a dollar today is more than the value of a dollar received a year from now –
A risk of price fall is always there, but losses on some investment with the help of diversification is off set by the gains on others. Also the returns from all the three funds come in two main forms. The first one is the dividend or interest income in which all investors receive an income that depends on the percentage of their investment and the other is increase in the price of the