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corporate treasurer

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Reggie White, a corporate treasurer, is trying to decide which of two 1-year securities to purchase: a negotiable CD with a nominal yield of 6 percent or a municipal security with a nominal yield of 4.25 percent. The issuing municipality is not in the same state as Reggie’s company, but he recognizes that the muni’s interest is exempt from federal income taxation. His company’s marginal federal tax rate is 39 percent. Which security should the treasurer select, assuming the securities have equal default risk?

*Answer in Excel Document, and show work/calculations on how you arrived at your answer**

 
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Arbitrage Pricing Theory

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1. Compare the assumptions underlying Arbitrage Pricing  Theory with those underlying the mean-variance Capital Asset Pricing Model.  Which set of assumptions seems more realistic to you? Why?

2. Show how the following events change the discount rate applicable to an expansion of an existing restaurant chain.

The covariance between restaurant sales and the market rate of return increases.

The riskless rate decreases

Several  other companies are planning to expand their chains

3.Which  of the following companies is likely to have a higher beta, and thus a higher  cost of capital ?

  • An  auto manufacturer who runs an assembly line with union workers. 
  • A  « high tech » auto manufacturer with a fully automated line requiring  only a handful of nonunion workers. 

4. Ampex common stock has a beta of 1.4. If the risk-free rate is 8%, the expected market return is 16%, and Ampex has $20 million of 8% debt, with a yield to maturity of 12% and a marginal tax rate of 50%, what is the WACC for Ampex?

 
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shares of the company’s stock

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The company has offered you a $5,000 bonus, which you may receive today, or 100 shares of the company’s stock, which has a current stock price of $50 per share. Mathematically, what is the best choice?

 
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The Dow Chemical Company

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  • Find the beta for The Dow Chemical Company using http://finance.yahoo.com/q/ks?
  1. Estimate the Dow Chemical Company  cost of equity.
  2. Estimate the Dow Chemical Company weighted average cost of capital.
  3. Estimate the Dow Chemical Company unlevered cost of equity.

Show the calculations in an Excel document. Be sure to label each calculation clearly.

 
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