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  to answer the following Questions:

  1. Can you explain interest rates in your own words?
  2. Interest rates are the cost to raise ______ capital.
  3. What is quantitative easing?
  4. What determines interest rates?

Please watch this video to get a better understanding of the Federal Reserve Banking System and answer the following questions: https://www.frbatlanta.org/about/fed-explained/2013/central-bank

  1. What is the meeting in which the Board of Governors and representatives from the regional Reserve Banks all convene to discuss and determine monetary policy direction?
  2. What are the three important jobs of the Federal Reserve? Please name and describe each one.
  3. Fill in the blank with the following options: fiscal or monetary

    The Federal Reserve sets _______ policy while the U.S. government sets _______ policy.
  4. Investors who hold bonds as an investment receive __________ as the return on their investment.
  5. The company issuing debt pays __________ on the debt to the investors who provided debt capital. This represents the company’s _________ of capital.
  6. What is the coupon on a bond?
  7. When interest rates in the economy go down, the value of assets go (up/down)?
  8. A 5-year bond with a face value of $1,000 was issued with a 3% annual coupon. Interest rates on similar bonds are now paying 7% interest. Is the bond selling at a premium or a discount?
  9. What is the value of this bond (use numbers in previous question to solve for PV of the bond)?
  10. Choose premium or discount. If interest rates have increased since the bond was issued, it will be trading at a ________. If interest rates have decreased, the bond will be selling at a ________.
  11. The yield curve shows the interest rates on debt with various maturities. It makes sense that it slopes upward under normal circumstances because investors expect a higher return for locking up their capital for a longer period of time. What does an inverted yield curve represent?

CHAPTERS 8 & 9: Please read the chapters and watch the videos provided to answer the questions.

  1. Use the CAPM formula to find the following: If rRF = 7%, rM = 12%, and b = 1.2, what is the required rate of return on the firm’s stock?

rs = rRF + (rM – rRF)b

  1. Consider the following information for three stocks, A, B, and C. The stocks’ returns are positively but not perfectly positively correlated with one another, i.e., the correlations are all between 0 and 1.

Expected

Standard

Stock

Return

Deviation

Beta

A

10%

20%

1.0

B

10%

10%

1.0

C

12%

12%

1.4

A portfolio has one third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium, so required returns equal expected returns. What is the expected return of the portfolio?

  1. Firm A is expected to pay a dividend of $1 at the end of the year. The required rate of return is rs = 11%. If the stock’s growth rate is 0%, what is the intrinsic value of the stock?
  2. If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock’s expected dividend yield for the coming year?
  3. Firm B has a 12% ROE. Other things held constant, what would its expected growth rate be if it paid out 25% of its earnings as dividends?

Formula: g = (1 – payout)ROE

CHAPTERS 10 & 11: Please read the chapters and watch the videos provided to answer the questions.

  1. What is the formula to find a company’s cost of capital?

A company is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects’ after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm’s average project. Bellinger’s WACC is 8%.

Year 0 1 2 3 4

Project A -1,010 700 370 240 290

Project B -1,010 300 305 390 740

  1. What is Project A’s NPV? Round your answer to the nearest cent. Do not round your intermediate calculations.
  2. What is Project B’s NPV? Round your answer to the nearest cent. Do not round your intermediate calculations.
  3. If the projects were independent, which project(s) would be accepted?
  4. If the projects were mutually exclusive, which project(s) would be accepted?

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