Quantitative Exercises and Final Project 3: Government Securities

Part One: Quantitative Exercises

Barbow Enterprises, Inc., is considering an expansion in their operations. One of the first items they want to examine is their cost of capital. According to the accounting department, the following items and their respective costs have been identified:

• The cost of Common Equity: 15%
• The before tax cost of debt: 12%
• No Preferred stock

They have also calculated the marginal tax rate to be 40% and the stock sells at its book value.

 Barbow Enterprises Inc. Balance Sheet Assets Liabilities and Owners’ Equity Cash \$240 Long Term Debt \$2,304 Accounts Receivable 480 Equity 3,456 Inventories 720 Net P&E 4,320 Total Assets \$5,760 Total Liabilities and owners’ Equity \$5,760

Required:

Calculate Barbow’s after-tax weighted average cost of capital, using the data in the balance sheet above.

Deliverable:

Use a Microsoft Excel spreadsheet that illustrates your calculations. You may use the formulas embedded in Microsoft Excel and/or a financial calculator for these calculations.

Part Two:  Final Project 3: Government Securities

In this part of your Final Project, you will research and analyze current information (that is, within the past two months) on government securities.

Step 1: Go to a financial Web site to do your research. The following are three suggested sites, but you may use others. Be sure to cite your sources!

Step 2: Research current information (within the last two months) on the yields and maturity for:

1. U.S. treasuries
2. Municipal bonds
3. Corporate bonds

Required:

• Discuss what the pure expectations theory would imply about the yield curve.
• Compare and contrast the yields and maturities for each of the securities.
• Discuss which you would hold and why relative to interest rate risk.

Deliverables:

Your submission may be in a 3–6 page Microsoft Word or Excel document. Include a Microsoft Excel document that illustrates your calculations. You may use the formulas embedded in Microsoft Excel and/or a financial calculator for these calculations.

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