Please see the attachment.
Suppose your firm receives a $5 million order on the last day of the year. You fill the order with $2million worth of inventory. Customer picks up entire order the same day and pays $1million upfront in cash; you also issue a bill for the customer to pay the remaining balance of $4million within 30 days. Suppose your firm's tax rate is 0%(ignore taxes). Determine possible consequences of this transaction for each of the following:
Your firm has identified 3 potential investments. The projects and their cash flows are shown here:
Project Cash flow Today Cash flow in one year
A -10 20
B 5 5
C 20 -10
Suppose all cash flows are certain and risk-free interest rate is 10%
a)What is NPV of each project
b)If the firm can chose only 1, which should it choose?
c)If the firm can choose any 2, which should it choose?
Suppose Bank One offers a risk-free interest rate of 5.5% on both savings and loans, and Bank Enn offers a risk-free interest rate of 6% on both savings and loans.
a)what arbitrage opportunity is available?
b)which bank would experience a surge in the demand for loans?which bank would get a surge in deposits?
c)What would you expect to happen to the interest rates the two banks are offering?
The promised cash flows of three securities are listed below. If the cash flows are risk-free and risk-free interest rate is 5%, determine the no-arbitrage price of each security before the first cash flow is paid
Security Cash Flow today Cash flow in 1 Year
A 500 500
B 0 1000
C 1000 0
The solution explains some questions relating to Arbitrage and Value of Money