J. Ross and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. Ross' common stock currently sells for $40 per share. The firm recently paid a dividend of $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year. J. Ross's cost of retained earnings is closest to:

Answers

Answer 1

Answer:

J. Ross's cost of retained earnings is 18.33%

Explanation:

Cost of retained earnings is also call Cost of Equity

Cost of retained earnings = (Dividend per share for next year / Current market value of stock) + Growth rate of dividend

Cost of retained earnings = 2 / 40(1-40%) + 10%

Cost of retained earnings = 2 / 24 + 10%

Cost of retained earnings = 0.08333 + 0.1

Cost of retained earnings = 0.183333

Cost of retained earnings = 18.3333%

Cost of retained earnings = 18.33%


Related Questions

Praveen Co. manufactures and markets a number of rope products. Management is considering the future of Product XT, a special rope for hang gliding, that has not been as profitable as planned. Since Product XT is manufactured and marketed independently of the other products, its total costs can be precisely measured. Next year’s plans call for a $350 selling price per 100 yards of XT rope. Its fixed costs for the year are expected to be $315,000, up to a maximum capacity of 550,000 yards of rope. Forecasted variable costs are $245 per 100 yards of XT rope.
Required:
1. Estimate Product XT's break-even point in terms of (a) sales units and (b) sales dollars.
2. Prepare a CVP chart for Product XT. Use 7,000 units (700,000 yards/100 maximum number of sales units on the horizontal axis of the graph, and $1,400,000 as the maximum dollar amount on the vertical axis.
3. Prepare a contribution margin income statement showing sales, variable costs, and fixed costs for Product XT at the break-even point.

Answers

Answer:

1a. 3,000 units

1b. $1,050,000

2. See attachment.

3. contribution margin income statement

Sales  ($350 × 7,000 units)                            $2,450,000

Less Variable Cost  ($245 × 7,000 units))     ($1,715,000)

Contribution                                                       $735,000

Less Fixed Costs                                              ( $315,000)

Operating Profit                                                 $420,000

Explanation:

Break-even point (sales units ) = Fixed Cost ÷ Contribution per unit

                                                   = $315,000 ÷ ($350 - $245)

                                                   = 3,000

Break-even point (sales dollars) = Fixed Cost ÷ Contribution Margin Ratio

                                                     = $315,000 ÷ ($105/$350)

                                                     = $1,050,000

Online B2B enables companies to enhance their performance by Multiple Choice reducing procurement costs. making supply-chain management unnecessary. making looser inventory control possible. lengthening order cycle time.

Answers

Answer:

reducing procurement costs.

Explanation:

Online business to business (B2B) marketing enables companies to enhance their performance by reducing procurement costs.

An online business to business (B2B) can be defined as a type of market where a business sells goods and services to another business online.

In an online business to business marketing or e-commerce, the cost of buying a product is usually lesser when compared to other channels of sales because the seller do not have to charge so much as sales are usually transparent and done automatically.

Hence, companies that are engaged in B2B are able to improve their performance and cut down the costs of procurement for goods and services.

every organization has a set of unwritten norms that mambers of the organization accept and understand and which guide their actions. this system of shared meaning is

Answers

Answer:

Organization's culture.

Explanation:

Every organization has a set of unwritten norms that members of the organization accept and understand and which guide their actions. This system of shared meaning is organization's culture.

An organizational culture typically comprises of values, norms, beliefs and assumptions which defines the most appropriate ways of behaving in an organization (work environment).

Generally, an organizational culture is usually designed and established by the top executives or management of an organization and communicated to the various employees working there.

According to Robert Quinn and Kim Cameron, an organizational culture can be divided into four (4) main categories;

1. Adhocracy culture.

2. Clan culture.

3. Hierarchy culture.

4. Market culture.

Additionally, the significance of an organizational culture is simply that it creates a unique social, efficient and psychological environment of an organization.

Henry​ Crouch's law office has traditionally ordered ink refills 50 units at a time. The firm estimates that carrying cost is 35​% of the ​$12 unit cost and that annual demand is about 235 units per year. The assumptions of the basic EOQ model are thought to apply. For what value of ordering cost would its action be​ optimal?

Answers

Answer:

ordering costs = $22.34

Explanation:

economic order quantity (EOQ) = √(2SD / H)

D = annual demand = 235H = holding cost = 35% x $12 = $4.20S = cost per order = ?EOQ = 50

50 = √[(2 x S x 235) / $4.20]

2,500 = (2 x S x 235) / $4.20

$10,500 = 2 x S x 235

S = $10,500 / (2 x 235) = $10,500 / 470 = $22.34

A bond par value is $1,000 and the coupon rate is 5.1 percent. The bond price was $946.02 at the beginning of the year and $979.58 at the end of the year. The inflation rate for the year was 2.6 percent. What was the bond's real return for the year

Answers

Answer:

the bond's real return for the year is 6.18 %.

Explanation:

First find the nominal return of the bond then the real return as follows :

PV = - $946.02

Pmt = $1,000 × 5.10% = $51

P/yr = 1

FV = $979.58

n = 1

r = ?

Using a Financial Calculator, the nominal return of the bond, r is 8.9385 %.

Real Return = ( 1 + nominal return) / (1 + inflation rate) -1

                   =  (1 + 0.089395) / (1 + 0.026) - 1

                   = 0.0618 or 6.18 %

you have been given this probability distribution for the holding for the holding-period return for GM stock. what is the expected standard deviation for GM stock

Answers

Answer:

14.86%

Explanation:

For computing the standard deviation, first we have to determine the expected return and then variance which is shown below:

= (Expected return of the boom × probability of boom) + (expected return of the normal growth × probability of normal growth) + (expected return of the recession × probability of recession)

= (0.30 × 0.40) + (0.11 × 0.40) + (-0.10 × 0.20)  

= 0.12 + 0.044 - 0.02

= 0.144

Now the variance would equal to the

= Probability × (Return - Expected Return) ^2

For boom:

= 0.40 × (0.30 - 0.144) ^2

= 0.0097344

For normal growth:

= 0.40 × (0.11 - 0.144) ^2

= 0.0004624

For recession:

= 0.20 × (-0.10 - 0.144) ^2

= 0.0119072

So, the total variance would be

= 0.0097344  + 0.0004624  + 0.0119072

= 0.022104

Now as we know that

Standard deviation is

[tex]\sqrt{variance} \\\\ = \sqrt{0.022104}[/tex]

= 14.86%

"The technique which identifies the time period required to recover the cost of the investment is called the" ________________ method.

Answers

Answer:

Cash payback method

Explanation:

Cash payback technique is a method used by financial experts to analyse capital projects to see which ones they can invest in and which one to avoid.

This method is used to estimate the time it will take for a project to recoup the original cost of investment. It estimated when a business will payoff initial cost and start giving the investor profit.

Cash payback is easy to calculate

Cash payback = (Initial investment) ÷ (Estimated cash inflows each year)

Shorter cash payback is favourable as the investor gets back initial cost in a shorter period.

A 65-year old widow that is in a low tax bracket and that has a low risk tolerance wishes to make an investment that will provide income. Which is the BEST recommendation

Answers

Answer:

Bank Certificate of Deposit (CD)

Explanation:

For the 65-year old widow in this scenario, the best recommendation would be a Bank Certificate of Deposit (CD). A traditional Bank CD is a time-bound deposit, in which you enter into an agreement to let the bank use your money for a fixed period of time, and in return, the bank pays you a higher interest rate than it would for a traditional savings account. Thus providing a good income with very low risk.

(1) You go to Seven-11 and see the price of a super Slurpee quoted as $1.39. (2) You buy the super Slurpee and pay with $1.39 in cash. In the first instance money serves as ___________, while in the second instance money serves as ___________.

Answers

Answer:

In the first instance money serves as Measure of Value, while in the second instance money serves as Medium of Exchange.

Explanation:

The measure of value and medium of exchange are two of the functions of money which are explained as follows:

a) Measure of Value

The function of money as a measure of value permits all goods and services to be attached prices. That is, every commodity is valued in terms of money. Therefore, money gives the opportunity to compare values of goods and services. Measure of value is also referred to as a unit of value.

From the question, the function of money as a measure of value is what permits Seven-11 to quote a super Slurpee as $1.39.

b) Medium of exchange

The function of money as a medium of exchange provides the opportunity use money as an intermediary instrument in order to ensure goods and services purchased, sold or traded between parties at a standard value. This is different from what obtained under the trade by barter in which commodities had to be exchanged for commodities without any standard value.

From the question, the function of money as a medium of exchange allows an amount of $1.39 which is a standard value was exchanged for the super Slurpee.

Answer:

(1) Unit of Account

(2) Medium of Exchange

Explanation:

(1) A unit of account is the measure in which prices are quoted. Thus, when the price of the super Slurpee is quoted in dollars, money functions as a unit of account.

(2) A medium of exchange is what people trade for goods and services. Thus, when you buy the super Slurpee, you are offering the $1.39 in exchange for the super Slurpee. Money here serves as a medium of exchange.  

Who is responsible for responding to workflow(s) for equipment dispatch requests through the business workplace require An approving authority must approve

Answers

Answer:

Commander

Explanation:

GCSS-Army is short for Global Combat Support System-Army. The GCSS is a section of the United States Army that is fielded under the 11th Armored Cavalry Regiment. There are the GCSS Wave 1 and GCSS Wave 2. These two groups have different roles.

The role of the Commander falls under the Wave 2 functions where he is required to perform the roles of maintenance, dispatch, unit supply, and property book functions. The Wave 1 function is mostly about allowing access to support supply activity functions. The commanders in any organization they work with can screen several transactions and give approval for equipment dispatch.

Martin Farley and Ashley Clark formed a limited liability company with an operating agreement that provided a salary allowance of $70,000 and $56,000 to each member, respectively. In addition, the operating agreement specified an income-sharing ratio of 3:2. The two members withdrew amounts equal to their salary allowances. Revenues were $668,000 and expenses were $520,000, for a net income of $148,000. a. Determine the division of $148,000 net income for the year. Schedule of Division of Net Income Farley Clark Total Salary allowance $ $ $ Remaining income Net income $ $ $ b. Provide journal entries to close the (1) revenues and expenses and (2) drawing accounts for the two members. For a compound transaction, if an amount box does not require an entry, leave it blank.

Answers

Answer:

a) Farley should get  $83,200

Clark should get $64,800

b) December 31, closing entry income summary account

Dr Income summary 148,000

    Cr Farley, Martin, capital 83,200

    Cr Clark, Ashley, capital 64,800

Explanation:

Martin Farley:

$70,000 salary allowance

60% of remaining income

Ashley Clark:

$56,000 salary allowance

40% of remaining income

if net income = $148,000, then:

Farley should get $70,000 + (60% x $22,000) = $83,200

Clark should get $56,000 + (40% x $22,000) = $64,800

Oligopoly firms will seldom change prices but if one firm increases their price, others may follow if costs have ____________ .

Answers

Answer:

decreased

Explanation:

if firms have decreased then it would be likely to follow other firms to increase popularity

Oligopoly firms will seldom change prices but if one firm increases its price, others may follow if costs have Decreased.

What is Oligopoly?

A market structure known as an oligopoly has a limited number of enterprises, none of which can prevent the others from having a large impact. The market share of the major companies is calculated using the concentration ratio.

A market with a monopoly has only one producer, a duopoly has two businesses, and an oligopoly has three or more businesses. The maximum number of firms in an oligopoly is unknown, but it must be low enough so that each firm's actions have a significant impact on the others.

In the past, oligopolies have existed in the steel industry, the oil industry, the railroad industry, the tire industry, grocery store chains, and the wireless industry. An oligopoly can prevent new competitors from entering the market, stifle innovation, and raise prices, all of which are detrimental to consumers.

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Ernest is applying for a carpentry apprenticeship program. He must take a test involving mathematical calculations including working with fractions and geometry. This is illegal because carpentry is a manual labor job and these tests are cognitive and not job-related.

A. True

B. False

Answers

Answer:

B. False

Explanation:

Since in the question, it is mentioned that Erney applied for a carpentry apprenticeship program. Also he took the test. This is not a illegal as if he wants to work in two specialized field than he could co but the work should be legal in nature and both the work are legal itself

Hence, the given statement is false

You currently have $3,000 in an account and plan on depositing $2,500 into the account each year, starting in one year. If the account earns an annual interest rate of 6.70%, how much will be in the account in 5 years, after making your final deposit?

Answers

Answer: $15,940.03

Explanation:

             Principle  Add Deposit Interest Total

Year 1 3000.00          201.00 3201.00

Year 2 3201.00 2500 381.97 6082.97

Year 3 6082.97 2500 575.06 9158.03

Year 4 9158.03 2500 781.09 12439.11

Year 5 12439.11 2500 1000.92 15940.03

After making deposits in a bank account as stated in the conditions given above, it can be inferred that an amount of approximately $15,940 will be available in the account after the end of 5 years.

What is the significance of deposits?

Deposits can be referred to or considered as such engagement of monies with any commercial bank that also provides a predetermined rate of interest to the customers making such deposit. Interest acts like a return on investment in this case.

The above condition is a case of making recurring deposits at regular intervals. Upon satisfying the conditions given above, the amount of monies in the account can be computed as below,

At the end of year 1, the Total deposit after interest earned will be

3000 + 6.70% = $3,201.

At the end of two years,

(3201 + 2500) + 6.70% = $6,083.

At the end of three years,

(6083 + 2500) + 6.70% = $9,158.

At the end of four years,

(9158 + 2500) + 6.70% = $12439.

At the end of five years,

(12439 + 2500) + 6.70% = $15,940.

Thus, it can be concluded that at the end of five years the deposits made after earning the interest will be $15,940.

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Crane Corporation has 2,000 shares of stock outstanding. It redeems 500 shares for $370,000 when it has paid-in capital of $300,000 and E & P of $1,200,000. The redemption qualifies for sale or exchange treatment for the shareholder. Crane incurred $13,000 of accounting and legal fees in connection with the redemption transaction and $18,500 of interest expense on debt incurred to finance the redemption. What is the effect of the distribution on Crane Corporation's E & P? Also, what is the proper tax treatment of the redemption expenditures?

Answers

Answer:

E&P $1,200,000 × 25%= $300,000 reduction

Crane Corporation would reduce its E & P in the amount of $300,000 as a result of the redemption.

This represents a 25% decrease in the amount of the E & P corresponding to the 25% stock redemption.

When a stock redemption results in sale or exchange treatment for the shareholder, the E & P account of a corporation is reduced in an amount not in excess of the ratable share of the E & P of the distributing corporation attributable to the stock redeemed.

As such, none of the expense of $13,000 of accounting and legal fees or other is deductible.

​If a beneficiary wants to make sure that the life insurance proceeds being paid out are not exhausted before he or she dies, the beneficiary would choose which of the following settlement options?
a. Fixed amount
b. Fixed income
c. Fixed time
d. Fixed period

Answers

Answer:

Option d. Fixed period

Explanation:

time is very essential. Anytime the policy owner specifies payment to be guaranteed for a specific period regardless of who is the beneficiary, policy owner or who receive the payment,is the fixed period settlement option.

Anything that occur  to annuity after the owner's death is dependent on the type of annuity and its payout plan.

A fixed-period,  is that which is for a certain period of time. the annuity guarantees payments to the annuitant for a set length of time. example is about  10, 15, or 20 years and case payments will continue to be paid to the beneficiary until the time given or  period is due or when  account’s balance reaches zero.

Indicate the proper accounting treatment for a change in the rate used to compute warranty costs.

a. Accounted for prospectively
b. Accounted for retrospectively

Answers

Answer:

a. Accounted for prospectively

Explanation:

Warranty cost is an expense i.e. to be incurred for the repair or replacement of the goods comes under the warranty given by the company.

Here if there is a change in the rate i.e. used for determining the warranty cost so it would be accounted in prospectively manner i.e. it would be changed in the current period and also the amount should be estimated or predicted

Hence, the correct option is a.

The maximum tax rate on estates and gifts: Question 7 options: is gradually increasing. has remained constant. is gradually declining. has increased sharply.

Answers

Is gradually declining.

Carla Vista Enterprises buys back 600,000 shares of its stock from investors at $6.50 a share. Two years later, it reissues this stock for $6.00 a share. The stock reissue would be recorded with a debit to Cash for:

Answers

Answer:

The stock reissue would be recorded with a debit to Cash for $3,600,000, a debit to additional Paid in capital $300,000 and Credit to treasury stock $3,900,000

Explanation:

Description                          Debit$          Credit$

Cash                                  3,600,000

(600,000 * $6.00)

Additional Paid in capital  300,000

(600,000 x $0.50)

Treasury stock                                            3,900,000

(600,000 * 6.50)

Margaret’s car loan statement said that she would pay $7,683.20 in interest for a 5-year loan at an interest rate of 9.8%. Assuming this is an example of simple interest, how much did Margaret borrow to buy the car?

Answers

Answer: $15680

Explanation:

Principal = Unknown

Time = 5 years

Rate = 9.8%

Simple interest = $7683.20

Simple interest= PRT/100

7683.20 = (P × 9.8 × 5)/100

7683.20 = 49P/100

Cross multiply

768320 = 49P

P = 768320/49

Principal = $15680

Margaret borrowed $15680 to buy the car.

Lacy's Linen Mart uses the average cost retail method to estimate inventories. Data for the first six months of 2021 include: beginning inventory at cost and retail were $60,000 and $120,000, net purchases at cost and retail were $312,000 and $480,000, and sales during the first six months totaled $490,000. The estimated inventory at June 30, 2021, would be:

Answers

Answer: $68,200

Explanation:

Estimated inventory = Difference between Goods available for Sale at Retail Price and Actual Sales made * Cost Retail Ratio

Retail value of Goods Available for Sale

= Retail Price of Beginning Inventory + Retail price of Purchases

= 120,000 + 480,000

= $600,000

Difference between Goods available for Sale at Retail Price and Actual Sales made

= 600,000 - 490,000

= $110,000

Cost to retail price ratio

= (Cost of Beginning Inventory + Cost of Purchases) / (Retail Price of Beginning Inventory + Retail Price of Purchases)

= (60,000 + 312,000) / (120,000 + 480,000)

= 62%

Ending inventory

= 110,000 × 62%

= $68,200

The infant industry argument says that Question 7 options: tariffs should be imposed to allow a new industry in a country to get established. imports should target new products from other countries to take advantage of the transmission of new ideas. dumping should be allowed in order to establish a presence of an industry that has previously not had a presence in another country. countries should produce and trade goods according to their comparative advantage.

Answers

Answer:

The infant industry argument says that Question 7 options:

tariffs should be imposed to allow a new industry in a country to get established.

Explanation:

The argument for the infant industry protectionism suggests that the imposition of tariffs on imports gives a new industry in the country the required breathing space it requires to develop, grow, and be established before it can face competitive forces from outside, which imports imply.  Since newly formed industries often do not command the economies of scale and learning experience that their competitors from other countries may have, therefore, they need to be singularly shaded from external competition until they have achieved similar economies of scale and learning curve.  But, can they attain any competitive edge without learning from competitors?

Suppose a shortage in materials results in decrease in the supply of golf balls in the United States of 5%. If the elasticity of demand of golf balls sold in the US is -0.8, the new equilibrium price will be

Answers

Answer:

price elasticity of supply (PES) = % change in quantity supplied / % change in price

PES = -0.8% change in quantity supplied = -5%

-5% = -0.8 / % change in price

% change in price = -0.8 / -5% = 16%

we are not given the initial price of the golf balls and I looked for similar questions but couldn't find any. But assuming that the initial price is $1, then the new price = $1 x (1 + 16%) = $1.16. If the initial price was $2, then new price = $2 x (1 + 16%) = $2.32. And son on.

g Once supply side effects are taken into​ account, tax cuts for labor income can change i. the supply of labor ii. potential GDP. iii. the growth rate of potential GDP.

Answers

Answer:

i, ii

Explanation:

a Tax is a compulsory sum levied by the government on income, goods or services. A tax cut would increase the supply of labour. As a result, the supply of labour would increase. As a result of the increase in labour, there would be an increase in potential GDP

"Rihanna Company is considering purchasing new equipment for $379,200. It is expected that the equipment will produce net annual cash flows of $48,000 over its 10-year useful life. Annual depreciation will be $37,920. Compute the cash payback period. (Round answer to 1 decimal place, e.g. 10.5.)"

Answers

Answer:

Cash payback period is 7.9 years

Explanation:

Payback period = Initial investment / Cash inflow per period

=$379,200 / $48,000

=7.9 years

Thus, the cash payback period is 7.9 years.

Note: It is assumed that the net annual cash flows are after considering the annual depreciation.

Which is the best example of price discrimination? Group of answer choices Higher price for a Ford truck than for a Ford car. Different price for a car wash on Tuesday versus Wednesday Average price of a 2000 square foot home in California being higher than in South Dakota.

Answers

Answer:

Different price for a car wash on Tuesday versus Wednesday

Explanation:

Price discrimination is when identical goods are sold at different prices from the same provider. A Ford truck and a Ford car are not identical items. The average price of a home in two very different states (one highly desirable due to temperature/climate, and one less desirable for the same reason) do not constitute price discrimination. But the days of the week someone is able to wash a car, at the same car wash is an identical service at a different price.

The best example of price discrimination is different price for a car wash on Tuesday versus Wednesday. The correct option is (B).

What do you mean by the price discrimination?

A selling tactic known as price discrimination involves charging clients various rates for the same good or service depending on what the vendor believes they can persuade the customer to accept.

When a merchant uses pure price discrimination, they charge each consumer the highest price they will agree to. When a seller discriminates on pricing, each consumer pays a different price for the same good or service.

Price discrimination is most beneficial when the profit gained from separating the markets exceeds the profit gained from maintaining the united markets.

Therefore, the best example of price discrimination is different price for a car wash on Tuesday versus Wednesday.

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Entries for Stock Investments, Dividends, and Sale of Stock Seamus Industries Inc. buys and sells investments as part of its ongoing cash management. The following investment transactions were completed during the year:

Feb. 24 Acquired 1,000 shares of Tett Co. stock for $85 per share plus a $150 brokerage commission.
May 16 Acquired 2,500 shares of Issacson Co. stock for $36 per share plus a $100 commission.
July 14 Sold 400 shares of Tett Co. stock for $100 per share less a $75 brokerage commission.
Aug. 12 Sold 750 shares of Issacson Co. stock for $32.50 per share less an $80 brokerage commission.
Oct. 31 Received dividends of $0.40 per share on Tett Co. stock.

Required:
Journalize the entries for these transactions.

Answers

Answer:

Date             Account Titles and Explanation      Debit$        Credit$

Feb 24.        Investment - Company T                    85,150

                         Cash {(1,000 * $85) + $150}                               85.150

                     (To record the purchase of stock)

May 16         Investment - Company I                      90,100

                         Cash{(2,500 * $36) + $100)                               90,100

                     (To record the purchase of stock)

June 14        Cash{(400 * $100) - $75}                      39,925

                    Investment {($85,150 * (400/1,000)}                      34,060

                       Gain on sales of investment                                5,865

                      (To record the sale of stock)

Aug 12.          Cash {(750 * $32.50) - $80}               24,295

                       Loss on sale of investment              2,735

                       Investment {$90,100 * (750/1,500)}                    27,030

                          (To record the sale of stock)

Oct 31               Cash ($0.4 * 600)                             240

                            Dividend income                                             240

                          (To record dividend income)

Draiman Guitars is offering 110,000 shares of stock in an IPO by a general cash offer. The offer price is $39 per share and the underwriter's spread is 8 percent. The administrative costs are $350,000. What are the net proceeds to the company?

Answers

Answer:

$3,596,800

Explanation:

The computation of net proceeds to the company is shown below:-

Net proceeds = Number of shares of stock × Offer price × (1 - Underwriter spread percent) - Administrative cost

= 110,000 × $39 × (1- 0.08) - $350,000

= 110,000 × $39 × 0.92 - $350,000

= $3,946,800 - $350,000

= $3,596,800

So, for determining the net proceeds we simply applied the above formula.

Wentworth's Five and Dime Store has a cost of equity of 11.4 percent. The company has an aftertax cost of debt of 5 percent, and the tax rate is 35 percent. If the company's debt–equity ratio is .74, what is the weighted average cost of capital?

Answers

Answer:

WACC = 6.66 %

Explanation:

Weighted average cost of capital is the average cost of all of the long-term types of finance used by a company weighted according to the that amount of finance used in relation to the total pool of fund

WACC = (Wd×Kd)  +  (We×Ke)

After-tax cost of debt = Before tax cost of debt× (1-tax rate)

Kd-After-tax cost of debt = 5%

Ke-Cost of equity = 11.4%

Wd-Weight f debt -74%

We-Weight of equity = 26%

WACC = (0.74× 5%)  + (0.26 × 11.4%) = 6.66 %

WACC = 6.66 %

Suppose that the risk-free rates in the United States and in the United Kingdom are 6% and 4%, respectively. The spot exchange rate between the dollar and the pound is $1.60/BP. What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs. Group of answer choices $1.63/BP $1.57/BP $1.60/BP $1.66/BP $1.70/BP

Answers

Answer:

$1.57/BP

Explanation:

Calculation for the futures price of the pound for a one-year contract.

Using this formula

Futures price =Spot exchange rate×(1+Risk-free rates in United States/1+Risk-free rates in United Kingdom

Let plug in the formula

Futures price=$1.60×(1.04/1.06)

Futures price= $1.60×(0.9811)

Futures price=$1.57/BP

Therefore the futures price of the pound for a one-year contract to prevent arbitrage opportunities will be $1.57/BP.

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