The Basis for Business Decisions - Essay Example

However, their operating margin falls from 5.57% to 4.50%. Suppose that they have no other income, interest expenses are unchanged, and taxes are the same percentage of pretax income as in 2009.b. What effect would a $10 million capital expense have on this year’s earnings if the capital is depreciated at a rate of $2 million per year for five years? What effect would it have on next year’s earnings?b. Which bank would experience a surge in the demand for loans? Which bank would receive a surge in deposits?

Bank One would get a surge in the demand for loans because it is offering 5.5%, while Bank Enn would get a surge in deposits because it is offering.Suppose a firm’s tax rate is 35%.a. What effect would a $10 million operating expense have on this year’s earnings? What effect would it have on next year’s earnings?It would lower taxes by 0.35 x $10 mln = $3.5 mln this year but have no effect on next year's earnings.b. What effect would a $10 million capital expense have on this year’s earnings if the capital is depreciated at a rate of $2 million per year for five years?

What effect would it have on next year’s earnings?EBIT would reduce by $2 mln each year for five years as the capital expenditure is depreciated. No effect on next year's earnings. Tax benefit would be 0.35 x 2 mln = $ 0.7 mln per year.Chapter 3: Interest Rates and the Time Value of Money6. Suppose the risk-free interest rate is 4%.a. Having $200 today is equivalent to having what amount in one year?200 x 1.04 = $208b. Having $200 in one year is equivalent to having what amount today.200/ 1.04 = $192.30c.

Which would you prefer, $200 today or $200 in one year? They are equivalent.d. Does your answer depend on when you need the money? Why or Why not? Interest is the price paid for waiting or giving up current consumption for the future. At the risk-free interest rate of 4%, $200 today is equivalent to $208 in one year (Meigs & Meigs, 1993). 8. Your firm has a risk-free investment opportunity where it can invest $160,000 today and receive $170,000 in one year. For what level interest rates is this project attractive?

170000/ 160000 = 1.0625 % Arbitrage and the Law of One Price