Would the yield spread on a corporate bond over a Treasury bond with the same maturity tend to become wider or narrower if the economy appeared to be heading toward a recession? Would the change in the spread for a given company be affected by the firm’s credit strength? Explain.

A bond’s expected return is sometimes estimated by its YTM and sometimes by its YTC. Under what conditions would the YTM provide a better estimate, and when would the YTC be better?

A Treasury bond that matures in 10 years has a yield of 5.75%. A 10-year corporate bond has a yield of 8.75%. Assume that the liquidity premium on the corporate bond is 0.35%. What is the default risk premium on the corporate bond?

A 5-year Treasury bond has a 5.2% yield. A 10-year Treasury bond yields 6.4%, and a 10-year corporate bond yields 8.4%. The market expects that inflation will average 2.5% over the next 10 years $\left(\Pi_{10}=2.5 \%\right)$. Assume that there is no maturity risk premium (MRP=0) and that the annual real risk-free rate, $I^{*}$, will remain constant over the next 10 years. A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described. What is the yield on this 5-year corporate bond?

A firm that wishes to minimize risk when investing idle cash would be least likely to buy:

a. commercial paper
b. long-term corporate bonds
c. certificates of deposit
d. treasury bills of the U.S. government

Amarindo, Inc. (AMR), is a newly public firm with $10.5$ million shares outstanding. You are doing a valuation analysis of AMR. You estimate its free cash flow in the coming year to be $\$ 15.37$ million, and you expect the firm's free cash flows to grow by $4.4 \%$ per year in subsequent years. Because the firm has only been listed on the stock exchange for a short time, you do not have an accurate assessment of AMR's equity beta. However, you do have beta data for UAL, another firm in the same industry:

$$\begin{array}{cccc} & \text{Equity Beta} & \text{Debt Beta} & \text{Debt-Equity Ratio} \\ \hline \text{UAL} & 1.80 & 0.36 & 1.2 \\ \hline \end{array}$$

AMR has a much lower debt-equity ratio of $0.36$, which is expected to remain stable, and its debt is risk free. AMR's corporate tax rate is $25 \%$, the risk-free rate is $5.5 \%$, and the expected return on the market portfolio is $11.3 \%$.

a. Estimate AMR's equity cost of capital.

b. Estimate AMR's share price.

The simple interest received from an investment is directly proportional to the amount of the investment. By investing $2000 in a corporate bond, you obtain interest of$120 at the end of 1 year. Find a mathematical model that gives the interest at the end of 1 year in terms of the amount invested P.

Goodtread Rubber Company has two divisions: the tire division, which manufactures tires for new autos, and the recap division, which manufactures recapping materials that are sold to independent tire recapping shops throughout the United States. Because auto manufacturing fluctuates with the general economy, the tire division's earnings contribution to Goodtread's stock price is highly correlated with returns on most other stocks. If the tire division were operated as a separate company, its beta coefficient would be 1.5. The sales and profits of the recap division, on the other hand, tend to be countercyclical because recap sales boom when people cannot afford to buy new tires. The recap division's beta is estimated to be 0.5. Approximately 75 percent of Goodtread's corporate assets are invested in the tire division, and 25 percent are invested in the recap division.

Currently, the rate of interest on Treasury securities is 6 percent, and the expected rate of return on an average share of stock is 10 percent. Goodtread uses only common equity capital, so it has no debt outstanding.

What is the required rate of return on Goodtread's stock?

"Corporate taxes Tantor Supply, Inc., is a small corporation acting as the exclusive distributor of a major line of sporting goods. During 2013, the firm earned $92,500 before taxes.

b. How much are Tantor Supply’s 2013 after-tax earnings?"

Flash Express purchases USB flash drives from suppliers and then applies corporate logos to the exterior of those flash drives for its customers. The company maintains a dedicated piece of equipment for each type of product that is processes, such as "top hat" flash drives, credit card flash drives, swing flash drives, and wristband flash drives. The company defines its batches based on customer orders. For example, if one customer places an order for 1,000 credit card flash drives, then that order would be processed as one batch and it would be shipped as one batch. If another customer places and order for 100 "top hat" flash drives, 100 swing flash drives, and 100 wrist band flash drives, then that order would be processed as three batches and shipped as one batch.

A number of activities carried out at Flash Express are listed below.

2. Engaging in price negotiations with the company's supplier of credit card flash drives.

Required:

Classify each of the activities above as either a unit-level, batch-level, product-level, customer level, or organization-sustaining activity.

You are painting a room in a community center. The room has four walls that are each 9 feet high and 25 feet long. There are two rectangular windows and two rectangular doors that do not need to be painted. Each window is 3.5 feet wide and 4 feet high. Each door is 3.5 feet wide and 7 feet high. A gallon of paint covers about 400 square feet. How many gallons of paint will you need in order to give the room one coat of paint?

A solution was prepared by dissolving $1210 \mathrm{mg}$ of $\mathrm{K}_3 \mathrm{Fe}(\mathrm{CN})_6(329.2 \mathrm{~g} / \mathrm{mol})$ in sufficient water to give $775 \mathrm{~mL}$. Calculate

(a) the molar analytical concentration of $\mathrm{K}_3 \mathrm{Fe}(\mathrm{CN})_6$.

(b) the molar concentration of $\mathrm{K}^{+}$.

(c) the molar concentration of $\mathrm{Fe}\left(\mathrm{CN}_6^{3-}\right.$.

(d) the weight/volume percentage of $\mathrm{K}_3 \mathrm{Fe}(\mathrm{CN})_6$.

(e) the number of millimoles of $\mathrm{K}^{+}$in $50.0 \mathrm{~mL}$ of this solution.

(f) $\mathrm{Ppm} \mathrm{Fe}(\mathrm{CN})_6^{3-}$.

(g) pK for the solution.

(h) $\mathrm{pFe}(\mathrm{CN})_6$ for the solution.

One common goal among fixed-income portfolio managers is to earn high incremental returns on corporate bonds versus government bonds of comparable durations. The approach of some corporate-bond portfolio managers is to find and purchase those corporate bonds having the largest initial spreads over comparable-duration government bonds. John Ames, HFS’s fixed-income manager, believes that a more rigorous approach is required if incremental returns are to be maximized. The following table presents data relating to one set of corporate/government spread relationships (in basis points, bp) present in the market at a given date: CURRENT AND EXPECTED SPREADS AND DURATIONS OF HIGH-GRADE CORPORATE BONDS (ONE-YEAR HORIZON)

$$\begin{matrix} \text{Bond Rating} & \text{Initial Spread over Governments} & \text{Expected Horizon Spread} & \text{Initial Duration} & \text{Expected Duration One Year from Now}\\ \text{Aaa} & \text{31 bp} & \text{31 bp} & \text{4 years} & \text{3.1 years}\\ \text{Aaa} & \text{40} & \text{50} & \text{4} & \text{3.1}\\ \end{matrix}$$

a. Recommend purchase of either Aaa or Aa bonds for a one-year investment horizon given a goal of maximizing incremental returns. b. Ames chooses not to rely solely on initial spread relationships. His analytical framework considers a full range of other key variables likely to impact realized incremental returns, including call provisions and potential changes in interest rates. Describe other variables that Ames should include in his analysis, and explain how each of these could cause realized incremental returns to differ from those indicated by initial spread relationships.

The supervisor of a community swimming pool has developed two methods for chlorinating the pool. If gaseous chlorine is added, a chlorinator will be required that has an initial cost of $8000 and a useful life of 5 years. The chlorine will cost$650 per year, and the labor cost will be $800 per year. Alternatively, dry chlorine can be added manually at a cost of$1000 per year for chlorine and $1900 per year for labor. Which method should be used on the basis of a present worth analysis if the interest rate is 10% per year?