Suppose Daimler Chrysler is considering which of two emission testing devices to buy

B10. (Replacement cycles) Suppose Daimler Chrysler is considering which of two emission testing devices to buy. Machine A costs $100,000, has a five-year useful life, and has operating expenses of $40,000 per year. Machine B costs $36,000, has a six-year useful life, and has operating expenses of $62,000 per year. Both machines will have zero salvage value, revenues of $85,000 per year, and straight-line depreciation to a zero book value, and both will be replaced at the end of their lives. Daimler Chrysler’s tax rate is 35%.

a. Assume a 12% cost of capital for each machine. Which one should Daimler Chrysler buy?
b. Suppose instead that machine A requires a higher cost of capital, 15%, because it’s a riskier process. Machine B’s cost of capital is still 12%. Which machine should Daimler Chrysler buy?

Click here for the solution: Suppose Daimler Chrysler is considering which of two emission testing devices to buy

Suppose that Everett McCleskey, a local businessperson, is a good friend of Al Miller, the owner of a local candy store

9-1A. Express versus Implied Contracts. Suppose that Everett McCleskey, a local businessperson, is a good friend of Al Miller, the owner of a local candy store. Every day on his lunch hour, McCleskey goes into Miller's candy store and spends about five minutes looking at the candy. After examining Miller's candy and talking with Miller, McCleskey usually buys one or two candy bars. One afternoon McCleskey goes into Miller's candy shop, looks at the candy, and picks up a $1 candy bar. Seeing that Miller is very busy, he waves the candy bar at Miller without saying a word and walks out. Is there a contract? If so, classify it.


Click here for the solution: Suppose that Everett McCleskey, a local businessperson, is a good friend of Al Miller, the owner of a local candy store

Suppose the realized rate of return on the market portfolio is one percentage point greater than its expected return

Suppose the realized rate of return on the market portfolio is one percentage point greater than its expected return. How would the realized rate of return compare with the expected return of a security with a beta of +2?


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Suppose there are only three risky assets, IAM stock, IBM stock, and ICM stock

Suppose there are only three risky assets, IAM stock, IBM stock, and ICM stock. The total market equity values of these companies at current prices are $150 million for IAM, $300 million for IBM, and $1,500 million for ICM. In addition there is $50 million of riskless bonds in the market. The proportion of the riskless asset held in the aggregate market portfolio would be?


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Suppose rFr=9%, rM=14% and bi=1.3.

Suppose rFr=9%, rM=14% and bi=1.3.

a). What is ri, the required rate of return on Stock i?

b). Now suppose rRF (1) increases to 10% or (2) decreases to 8%. The slope of the SML remains constant. How would this affect rM and ri?

c). Now assume rRF remains at 9% but rM (1) increases to 16% or (2) falls to 13%. The slope of the SML does not remain constant. How would these changes affect ri?
Click here for the solution: Suppose rFr=9%, rM=14% and bi=1.3.

(Using Spot and Forward Exchange Rates) Suppose the spot exchange rate for the Canadian dollar in Can $1.05 and the six- month forward rate is Can $1.07

(Using Spot and Forward Exchange Rates) Suppose the spot exchange rate for the Canadian dollar in Can $1.05 and the six- month forward rate is Can $1.07.

a) Which is worth more, a U.S. dollar or a Canadian dollar?

b) Assuming absolute PPP holds, what is the cost of the United States of an Elkhead beer if the price in Canada is Can$2.50? Why might the beer actually sell at a different price in the United States?

c) Is the U.S. dollar selling at a premium or a discount relative to the Canadian dollar?

d) Which currency is expected to appreciate in value?

e) Which county do you think has higher interest rates- the United States or Canada? Explain.

Click here for the solution: (Using Spot and Forward Exchange Rates) Suppose the spot exchange rate for the Canadian dollar in Can $1.05 and the six- month forward rate is Can $1.07