Why do state and local governments prepare capital budgets? Discuss the steps in the capital budgeting process. What issues should government budget officials be mindful of in the preparation and execution of capital budgeting?

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Capital budgeting process

Responses to the questions should be in essay format. Your answers must show originality, be straight to the point and not be more than 3 double-spaced pages to a question.

Why do state and local governments prepare capital budgets? Discuss the steps in the capital budgeting process. What issues should government budget officials be mindful of in the preparation and execution of capital budgeting?

Explain what types of policies a central bank can implement to reduce and increase he interest rate. Graphically illustrate and explain what effect a purchase and sale of bonds by the Federal Reserve will have on the money market.

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Macro Economics

QUESTIONS Q1 First, explain why the money demand curve is downward sloping. Second, graphically illustrate and explain what factor(s) will cause shifts in the money demand curve. Explain what effect changes in interest rate and nominal GDP have on the demand for central bank money.

Q2 Explain what types of policies a central bank can implement to reduce and increase he interest rate. Graphically illustrate and explain what effect a purchase and sale of bonds by the Federal Reserve will have on the money market.

Q3 The demand for money is given by MD = $Y (0.15 – i), where $Y = $20,000 (million), the money supply (MS) is $2000 (million), and i is the policy interest rate determined by the central bank.

  1. a.What is the equilibrium interest rate? Show the equilibrium interest rate on a diagram with money demand and supply curves.
  2. Suppose that the following year the nominal GDP ($Y) increases from $20,000 to $25,000 (million) and the amount of money in circulation remains unchanged. What would be the new equilibrium interest rate? Show the equilibrium interest rate on a diagram with money demand and supply curves.
  3. c.Now suppose that the central bank responds to the change in GDP by $500 (million) increase in money supply. What is the impact on the interest rate if central bank money is increased to $2500 (million)? Show the equilibrium interest rate on a diagram with money demand and supply curves.

 

Using the labor market models, analyze the consequences on labor supply and demand that might have operated during Covid and its legacy going forward.

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Impact of COVID-19 on Labour supply and demand and consumer behavior

Amongst many issues, Covid-19 brought about a reduction in consumption of a number of goods and services (restaurants, movie theaters, airlines, tourism,…). In fact, a remarkable feature of Covid-19 was the significant increase in personal savings in the US economy (and several other economies around the world). The spike in the personal savings rate is dominated by the large government transfers to households through the CARES and subsequent programs, though the increase in savings goes beyond those transfers as can be seen in the graph labeled 1 in the attachment named graphs.

Another feature of Covid is the remarkable movement in labor force participation, as described in the graph 2 – see attached

A final feature of Covid has been the remarkable increase in New Business Applications and reduction in the number of bankruptcies that, typically, have led to increases in business creation. In the past, new entrants have led to faster productivity gains. see graph 3

  1. a) Use the consumption/savings to explain this consumer behavior. Make sure to include in your comments the evolution of real disposable personal income, precautionary savings and hand-to-mouth households. **you must create graphs for explanation for personal income, hand-to-mouth and tie the explanation to the graphs. You may use Euler equation to explain precautionary savings See sample models in the attached document and use it as a reference point to create graph
  2. b) Using the labor market models, analyze the consequences on labor supply and demand that might have operated during Covid and its legacy going forward. **you must include graphs for explanation and tie the explanation to the graphs. See sample models in the attached document and use it as a reference point to create graph

 

Read and respond to “Fifteen Fatal Fallacies of Financial Fundamentalism” by William Vickery. Discuss his views on deficits, credit and inflation and see if you agree or disagree.

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Fifteen Fatal Fallacies of Financial Fundamentalism

Read and respond to “Fifteen Fatal Fallacies of Financial Fundamentalism” by William Vickery. Discuss his views on deficits, credit and inflation and see if you agree or disagree.

What is the purpose of a corporation? To what extent is the growing emphasis on ESG – the environmental, sustainability and governance dimensions of business activity – a challenge to the traditional principles of corporate finance?

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Purpose of a corporation

What is the purpose of a corporation? To what extent is the growing emphasis on ESG – the environmental, sustainability and governance dimensions of business activity – a challenge to the traditional principles of corporate finance?

Which explanation did Jakiela and Ozier investigate in their 2015 paper? What were their conclusions about whether this factor matters? Why could index-based insurance schemes work where other insurance schemes fail?

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Savings and Insurance

List and describe three possible explanations for the observed low savings rate in low-income countries

Which explanation did Jakiela and Ozier investigate in their 2015 paper? What were their conclusions about whether this factor matters?

Why could index-based insurance schemes work where other insurance schemes fail?

How does mobile money and digital credit can help to improve risk-sharing in small communities lacking access to insurance companies?

 

 

Explain why low-income households have limited liability in credit markets. Name two important consequences that result from limited liability and asymmetric information in the credit market.

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Discussion Question

Typewrite your answers and show all your work when making calculations. You can make calculations by hand and add the images to the document but make sure to typewrite your answers . Remember to submit to Canvas before 2:30 pm on the due date.

Credit

Explain why low-income households have limited liability in credit markets.

Name two important consequences that result from limited liability and asymmetric information in the credit market.

Using the two terms you listed in part b above, categorize the following as being examples of either one, the other, or neither:

Choosing a high value, but risky agricultural project.

Only individuals wanting to invest on projects that offer high reward, but low probability of success are the ones seeking loans.

 

 

Summarize the moral dilemma and address the topic thoroughly giving multiple perspectives. Provide your own conclusion based on moral reasoning.

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Event in sports and athletics

Each student will choose one of the 12 chapter topics from the assigned textbook and respond to a current event in sports and athletics which provides a moral dilemma.

Criteria:

  • 4-6 pages in length
  • Utilize at least 5 credible sources.
  • Include a bibliography properly documenting each source.

Summarize the moral dilemma and address the topic thoroughly giving multiple perspectives.

Provide your own conclusion based on moral reasoning.

Using the information above, derive the two missing prices. How can you produce a bear call spread using the two calls above? What is the price of this bear call spread?

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Frogs reproductive

Section A:

Question 1
i. Consider the following four risk-free government bonds: A, B, C, and D. All four bonds have a face value of £100 and pay annual coupons, but the coupon rates are different. Bond A has a coupon rate of 6%, B 7%, C 8%, and D 9%. Both A and B mature in two years while C and D mature in four years. Bonds A, B, C, and D are currently trading at £102.78, £104.65, £112.62, and £116.22, respectively.
a. Calculate the 1-year, 2-year, 3-year, and 4-year spot rate. What is the shape of the term structure? [10 marks]
b. Which theory of the term structure can explain the shape above? Explain the intuition. [5 marks]

ii. Suppose the price of espresso machines is risky, with a CAPM beta of 0.8. The monthly storage cost is $10, and the current spot price is $1,000. However, one can also rent out the machine to earn $5 per month. Storage costs and rent are paid at the end of each month. The expected rate of return on the market is 1.5% per month, with a risk-free rate of 0.5% per month. [Hint: for the purpose of this question, you may assume that there is no depreciation on the espresso machine.]
a. What is the required monthly return on an asset with the espresso machine’s beta? [2 marks]
b. Using your answer above, work out what price the espresso machine should sell for in 3 months (excluding storage costs). [3 marks]
c. Suppose that you need an espresso machine in 3 months. You believe that the price of the espresso machine in 3 months will be $1,050. Which of the following would be cheaper overall: buying the espresso machine today or buying it in 3 months? [5 marks]

Question 2
i. The following table lists prices of options on Apple’s stock.
a. Using the information above, derive the two missing prices. [5 marks]
b. How can you produce a bear call spread using the two calls above? What is the price of this bear call spread? [5 marks]

ii. Read the following statements. For each statement, first state whether it is true or false. Then explain your reasoning.
a. XYZ reported a profit of $270 million for 2020. At the same time, their share price dropped by 10% in the same year. The fact that the stock market reacted Stock Time to
Exercise
(months)
Exercise
Price
Stock
Price
Put
Price
Monthly
Interest
rate
Call
Price
Apple 1 120 126 2 1% ?
Apple 1 122 126 ? 1% 6

b. Your friend Jonny made a total return of 100% in 2020 by investing in GameStop, beating the market return by a big margin. In the same year, your friend Sammy made a total return of 5% by investing in government bonds, much lower than the market return in 2020. Given that Jonny outperformed Sammy substantially, Jonny must be a better investor. [3 marks]

c. Managers make superior returns on their purchases of their company’s stock. This violates the strong form of market efficiency. [3 marks] iii. Both Firm A and Firm B earn £20 per share every year. Firm A’s equity has a beta of 0.5 and Firm B’s equity has a beta of 1.5. The expected market return is 10% per year and the risk-free rate is 2% per year. Firm A pays out all its earnings to equityholders. Firm B retains half its earnings and pays out the other half to equityholders.
a. What are the required rates of return for A and B’s equity? [2 marks]

b. Suppose that the ROE is 15% for Firm B. The first dividend will be paid one year from today. Calculate the current share price for both Firm A and Firm B. Why are the two prices different? [4 marks]

Section B:

Question 3 (25 marks)
CorVIR Inc. is a firm whose operations generate an expected EBIT (earnings before interest income, interest expenses and corporate taxes) of $80 per year in perpetuity. These are all the cash-flows that the firms’ operating assets are generating, and the company is currently all- equity financed. Given the risk of CorVIR’s operations, the market requires a return of 15%, i.e., the unlevered cost of capital is 15% for these cash-flows. In addition to its operating assets, CorVIR holds $150 of excess cash on its balance sheet, which is invested in Treasury-bills generating a risk-free return of 4% every year before corporate taxes. The corporate tax rate is 40%. CorVIR is listed on a stock exchange and has 1,000 shares outstanding.
i. Assume the market believes that CorVIR will keep the $150 of cash on its balance sheet forever and never take on any debt. What is the market value of CorVIR’s equity and the price of CorVIR’s stock? (Hint: Excess cash invested in treasury is similar to carrying negative debt and therefore features tax disadvantage that is opposite to the usual interest tax shield) (6 marks)
Now assume that CorVIR announces that the firm will undertake a leveraged recapitalisation.
In this transaction, CorVIR will take on $250 of new permanent fixed debt and use the proceeds from the debt issue, together with the $150 of cash it already holds, to pay a special dividend to shareholders of $400 (40 cents per share). Assume that the risk of the tax shield of the debt is the same as the risk of the debt. The interest rate on the debt will be 6%.

ii. What will happen to the price of CorVIR’s stock when this recapitalisation plan is announced? (6 marks)

iii. Assume now that CorVIR goes ahead with this recapitalisation, i.e., raises $250 of debt and pays a dividend of $400. What will be the market values of CorVIR’s equity and debt after this transaction has been completed? What will be the stock price? What is the change in total shareholder value from this transaction (vis-à-vis the case before the transaction was announced)? (7 marks)

iv. Assume now that CorVIR, instead of paying a dividend, uses the $400 (the excess cash plus the proceeds from the debt issue) to repurchase its own shares. How many shares will CorVIR be able to acquire? What will be the stock price of CorVIR after the share buyback? What is the change in shareholder value from this transaction (vis-à-vis the case before the transaction was announced)? (6 marks)

Question 4 (25 marks)
Los Pollos Inc.’s shares trade at $30, and the company has 100 million shares outstanding. Hermanos Ltd.’s shares trade at $20, and the firm has 30 million shares outstanding. The two companies are fully equity financed. The free cash-flows for Los Pollos Inc. are expected to be $300 million next year, while Hermanos Ltd. predicts its free cash-flows to be $72 million next year. Both companies think that the level of cash-flows will stay constant thereafter (forever) Los Pollos Inc. plans to acquire Hermanos Ltd. Assume that there are no other informational effects other than the ones described in the text. The market risk premium is 7% and the risk- free rate is 3% in this economy.
i. Compute the unlevered (asset) Beta and the unlevered cost of capital of the combined firm assuming no synergies are created in the deal. (3 marks) The manager of Los Pollos Inc. is convinced that the acquisition will generate economies of scope. These savings amount to an additional free cash-flow of $30 million starting next year, which will subsequently occur annually and remain constant.

ii. Compute the present value of the synergies and the value of the combined firm. Use the unlevered cost of capital calculated in (i) as the discount rate for the synergies. (3 marks)
iii. What is the maximum percentage premium that Los Pollos Inc. could pay in a cash transaction without losing money on the acquisition? If, instead, the acquisition took place via a stock-swap transaction, what is the highest exchange ratio Los Pollos could offer? (4 marks)

You are a senior analyst at a hedge fund specialising in merger arbitrage. A version of the investment strategy trades target shares after a merger announcement and closes the position once the outcome of a merger is certain. Let’s implement this strategy. Assume that you can both take long and short positions in stocks.

iv. Suppose that Los Pollos and Hermanos agree to a cash offer at $27 per share. Following the announcement, Hermanos’ share price jumps to $26.3. What is the market-implied probability of the merger failing (e.g., the regulator may not approve the deal)? (3 marks)

v. Your team of SSE interns independently estimated the probability of the merger failing. You trust your interns to know better than the market. For which range of possible SSE-intern-estimated failure probabilities would you buy Hermanos’ shares after observing the share price jump to $26.3 after the announcement? What would be the maximum profit per share traded? For which range of possible SSE-intern-estimated failure robabilities would you (short) sell Hermanos’ shares after observing the share price jump to $26.3 after the announcement? What would be the maximum profit per share traded? (6 marks)

vi. Suppose instead that Los Pollos Inc. and Hermanos Ltd. agree to a stock-swap merger with an exchange ratio of 0.9. Right after the announcement of the stock-swap merger at these terms, the Hermanos Ltd. share price jumps to $26.5. What is the implied probability of the merger not going through? (6 marks)

How is the exchange rate determined? What is the theory of the Purchasing Power Parity (PPP)? What is the main prediction of the PPP?

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Exchange Rate Determination in the Long Run – Data Evidence of the Theory of Purchasing Power Parity

Nowadays, most countries are involved in international trade, which requires them to convert their currencies into other countries’ currencies to make investments, and/or export or import goods. An essential task of economists in any country is the exchange rate determination (or prediction). Fluctuations in the exchange rate affect the prices many households pay to obtain foreign-made goods and services known as imports. For instance, in 2019, the total value of US exports in constant 2015 US dollars was 2.44 trillion dollars, and the total value of US imports was 3.12 trillion dollars .

  • How is the exchange rate determined?
  • What is the theory of the Purchasing Power Parity (PPP)?
  • What is the main prediction of the PPP?