1. Your savings of $200,000 is earning 8% interest. A. If retirement is scheduled in 15 years and inflation is expected to average 5% annually during that period, will you have accumulated the $300,000 in purchasing power that you deem necessary? If not, by how much will you be short?
8% b. 8% 2. a. A $1,000 bond has a 7.5 percent coupon and matures after 10 years. If current interest rates are 10 percent, what should be the price of the bond? Price = $1,000 x 0.3855 + $1,000 x 7.5% x 6.1446 Price = $385.50 + $460.85 Price = $846.35 b.
Financing Strategy Problem Week 5 Firm A has $10,000 in assets entirely financed with equity. Firm B also has $10,000 in assets, but these assets are financed by $5,000 in debt (with a 10 percent rate of interest) and $5,000 in equity. Both firms sell 10,000 units of output at $2.50 per unit. The variable costs of production are $1, and fixed production costs are $12,000. (To ease the calculation, assume no income tax.)
Reporting Intercorporate Interests (Equity vs Cost Method) 1. On January 1, 2007, Rotor Corporation acquired 30 percent of Stator Company’s Stock for $150,000. On the acquisition date, Stator reported Net assets of $450,000 valued at historical cost and %500,000 stated at fair Value. The difference was due to the increased value of buildings with a remaining life of 15 years. During 2007 and 2008 Stator reported Net Income of $25,000 and $15,000 and paid dividends $10,000 and $12,000, respectively.
These expenditures will be depreciated on a straight line basis over 5 years. The cost of the ship will be depreciated on a straight line basis over 25 years. Taxation rate is 35%. The ship would cost $39 million, with 10% of the purchase price to be paid in 2001 and 10% due in 2002. The balance would be due on delivery in 2003.
TIME VALUE OF MONEY Assignment 1. What is the present value of: a. $8,000 in 10 years at 6% b. $16,000 in 5 years at 12% c. $25,000 in 15 years at 8% d. $1,000 in 40 periods at 20% 2. If you invest $12,000 today, how much will you have: a.
What would be the second year future value? (LG4-3) FV = 750 × (1 + 0.10) (1 + 0.12) 750 × 1.10 × 1.12 Answer: 924.00 4-11 Present Value What is the present value of a $1,500 payment made in six years when the discount rate is 8 percent? (LG4-4) PV = 1500/(1+0.08)6 1500/1.586874323 Answer: 945.25 4-13 Present Value with Different Discount Rates Compute the present value of $1,000 paid in three years using the following discount rates: 6 percent in the first year, 7 percent in the second year, and 8 percent in the third year. (LG4-4) PV = 1000 / ((1 + 0.06) (1 +0.07) (1 + 0.08)) 1000/ (1.06 × 1.07 × 1.08) 1000/1.224936 Answer: 816.37 4-16 Rule of 72 Approximately how many years are needed to double a $500 investment when interest rates are 10 percent per year? (LG4-6) N=72 / 10 Answer: 7.2 4-31 Solving for Time How many years (and months) will it take $2 million to grow to $5 million with an annual interest rate of 7 percent?
Answer AR= 20x20000=400,000 3-2 Debt Ratio Vigo Vacations has an equity multiplier of 2.5. The company’s assets are financed with some combination of long-term debt and common equity. What is the company’s debt ratio? Answer Equity multiplier Asset /equity = 2.5/1 A=L+E 2.5=1.5=+1 Debt/asset = 1.5/2.5 = .6 3-3 Market/Book Ratio Winston Washers’s stock price is $75 per share. Winston has $10 billion in total as- sets.
Similar non-convertible bonds are priced to yield 10 percent. The bond matures in 10 years stock in Reliance sells for $ 36 per share. Q1) What are the conversion ratio, conversion price, and conversion premium? Q2) What is the straight bond value? Q3) What is the conversion value?
What is its ROE? ROE= profit margin*asset turnover*equity multiplier Asset turnover 3%= sales $100 million/$50 assets=2 equity multiplier=2 3%*2*2=12 3-6 Du Pont Analysis Donaldson & Son has and ROA of 10%, a 2% profit margin, and a return on equity equal to 15%. What is the company’s total assets turnover? What is the firm’s equity multiplier? ROA= 10%; Profit Margin =2%; ROE= 15% 10/2= S/TA=5 15/10=