Most money market participants want or need to borrow large amounts of cash, so that transactions costs are low relative to the interest paid. b. Money market instruments have low default risk. The risk of late or nonpayment of principal and/or interest is generally small. c. Money market securities must have an original maturity of one year or less.
AMERITRADE COST OF CAPITAL ANALYSIS Questions: 1. What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why? Ameritrade management should consider the opportunity cost of capital for the proposed advertising program and technology upgrades. It is important that Ameritrade not emphasize it’s company cost of capital, which is the opportunity cost of capital for investment in all the firm’s assets, and therefore becomes problematic if the firm is looking at a new project/asset (because most likely this new project will be more/less risky than the firm’s exist business).
If interest rates remain at the level they currently are, then a capital structure with debt financing would be a good option. However I believe that the Federal Reserve cannot keep the interest rates as low as they are now for much longer and that we will see interest rates rise in the near future. When this happens the market value of the corporate bonds will be less for investors. We will see a shift from debt financing for companies back to equity financing because investors will gain a better return. With debt financing, the company has an obligation to make periodical coupon payments and ultimately pay back the face value of the bond at expiration.
Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life. a. True b. False (11-2) NPV and IRR F I Answer: b EASY [iv]. A basic rule in capital budgeting is that If a project's NPV exceeds its IRR, then the project should be accepted.
It is standard practice for companies to discount future cash flows at a predetermined discount rate to determine whether or not the company will be profitable. However, using performance compared to hurdle rates would be somewhat challenging in that managers would have an incentive to underestimate a project’s true cost of capital in order to consistently beat their estimates. 2. What is the weighted average cost of capital for Marriott Corporation as a whole? What type of investments would you value using this WACC?
Depository institutions are supposed to be managed to limit risk. Their managers, thus, may not be conditioned to operate prudently in more speculative securities businesses... The case against preserving the Glass-Steagall Act: 1. Depository institutions will now operate in "deregulated" financial markets in which distinctions between loans, securities, and deposits are not well drawn. They are losing market shares to securities firms that are not so strictly regulated and to foreign financial institutions operating without much restriction from the Act.
a stock purchase has no effect on the tax basis of the Company’s assets. Instead, he will be taking a stepped up basis in the stock purchased equal to the amount he pays for the stock, and the taxable income inherent in the Company’s assets remains inherent in the assets. Johnsons Services is already showing losses. While issuing debts in JS may give a rise to debt to equity ratio, the company should be careful in considering equity financing not to trigger an ownership change under Section 382 which may lead to limitations of using NOLs. Also, with even higher liabilities, it may be difficult to meet the debt service agreements if the company doesn’t have enough cash flow from operations.
What is more, a company may choose to pay dividend as the consideration for their investment, because high dividend payout is important for investors as dividends provide certainty about the company's financial well-being. Dividends are also attractive for investors looking to secure current income. In addition, some analysts indicate that how the decrease and increase of a dividend distributions from Champion can affect the price of its security. Companies like Champion that have a long-standing history of stable dividend payouts would be negatively affected by lowering or omitting dividend distributions. So it would be positively affected by increasing dividend payouts or making additional payouts of the same dividends.
If the underlying exposure had a deficit, the swap would offset the loss with a gain. These CDS’s provided some protection against any movements in the credit market (Bear Stearns and the Seeds of its Demise, 2008). The investment strategy of the High Grade Structured Credit Strategies Enhanced Master Fund was essentially the same as the one above; however, there was a greater investment into low-risk securities. Thus, increasing the amount of leverage to enable this additional investment. This investment would then create a higher return, but with limited risk (Bear Stearns and the Seeds of its Demise, 2008).