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# Interest Rates and the Cost of Debt

### Determinants of interest rates

Please help me figure out the solutions to these problems. You have found three investment choices for a one year deposit: 10% apr compounded monthly, 10% apr compounded annually, and 9% apr compounded daily. Compute the EAR for each investment choice. (assume 365 days in the year) A 30 year mortgage with and EAR 0f 5

### A) What annual interest rate did the man pay? B) How much would the man need to repay at the end of two months if he borrowed \$5000 with the same rules and same annual interest rate?

1. Three students each have \$1000 to invest from their summer jobs. Armen invests his money in an account that earns simple interest at an APR of 5 percent. Barok invests his money in an account that earns 4.9 percent interest per year compounded annually. Carrie invests her money in an account that earns 4.8 percent interest pe

### Need help with Financial Management

4. Ingram Office Supplies, Inc., buys on terms of 2/15, net 50 days. It does not take discounts, and it typically pays on time, 50 days after the invoice date. Net purchases amount to \$450,000 per year. On average, what is the dollar amount of costly trade credit (total credit â?" free credit) the firm receives during the ye

### Targeted retirement

Suppose you want retire when you have \$1,000,000. If the interest rates paid by banks on individual retirement accounts (IRAs) rise from 4 percent to 8 percent, what will happen to the time it takes to reach your targeted retirement savings amount?

### Debt to equity ratio, cost of equity, no taxes, tax rate of 34%

1) A firm has a debt-to-equity ratio of .60. Its cost of debt is 8%. Its overall cost of capital is 12%. What is its cost of equity if there are no taxes or other imperfections? 2) Wild Flowers Express has a debt-equity ratio of .60. The pre-tax cost of debt is 9% while the unlevered cost of capital is 14%. What is the cost o

### How much is the company planning to raise toward the factory

Optimism Inc. anticipates the need for the factory expansion four years from today. the firm has determined that it will have the necessary funds for expansion if it puts \$400,000 per year into a stock portfolio expected to earn 9% per yer. Deposits will be made at the endo of each year. How much is the company planning to ra

### Target Corporation: Memo explaining what information will be highlighted

Details: Refer to Target Corporation's financial statements (http://investors.target.com/phoenix.zhtml?p=irol-irhome&ref=nav%5Ffooter%5Finvestors&c=65828) . Target Corporation is currently seeking additional capital to expand its operations. Two companies have shown interest in providing additional capital. Company #1 is

### How fast does your money grow

Barry wants to invest in 5-10 years. A financial planner told him that a ROTH IRA would be more profitable over time than a regular IRA. Use formula FV=\$1(1+R)n where R is the period rate and n is the number of periods. - Calculate the accumulated value of an investment of \$2,000 at 6% compounded annually for 35 years. -

### Note Receivable with interest.

On September 1, 2008, Active Networking sold a computer networking system to Finn Motors for \$26,000. Finn Motors signed a note with interest at 9%, agreeing to pay the principal and interest in six months. Active Networking's year end is December 31. What items would be included on Active Networking's income statement and ba

### Cost of capital changes when debt financing increases

Please assist in responding to the following questions regarding debt financing: As a firm initially substitutes debt for equity financing, what happens to the cost of capital, and why? If a firm uses too much debt financing, why does the cost of capital rise?

### Contribution of security selection and contribution of asset allocation

Problem 1: Consider the following information regarding the performance of a money manager. The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocation in column (3), and the returns

### Which of the following Treasury bonds will have the largest amount of interest rate risk (price risk) and why?

Which of the following Treasury bonds will have the largest amount of interest rate risk (price risk) and why? A. A 7% coupon bond which matures in 12 years. B. A 9% coupon bond whic matures in 10 years. C. A 12% coupon bond which matures in 7 years. D. A 7% coupon bond which matures in 9 years. E. A 10%

### Treasury bonds and the largest interest rate risk

Which of the following Treasury Bonds will have the largest amount of interest rate risk (price risk) and why? A. A 7% coupon bond which matures in 12 years. B. A 9% coupon bond which matures in 10 years. C. A 12% coupon bond which matures in 7 years. D. A 7% coupon bond which matures in 9 years. E. A 10%

### Calculate the highest effective rate of interest and explain why.

You are interested in investing your money in a bank account. Which of the following banks provides you with the highest effective rate of interest and why? a) Bank 1; 8% with monthly compounding b) Bank 2 ;8% with annual compounding c) Bank 3 ;8% with quaterly compounding d) Bank 4; 8% with daily compounding e) Bank 5;

### Expected Interest Rate

The real risk-free rate is 3%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury securities? Please show all work.

### Calculating an Account Balance: Example Problem

You just deposited \$2,500 in a bank account that pays a 12% nominal interest rate, compounded quarterly. If you also add another \$5,000 to the account on year (12 months) from now and another \$7,500 to the account two years from now, how much will be in the account three years (12 quarters) from now? Please also show:

### Consolidation and noncontrolling interest

On January 1, 2010, Doone corporation acquired 60 percent of the outstanding voting stock of Rockne company for 300,000 consideration. At the acquisition date, the fair value of the 40 percent noncontrolling interest was 200,000 and rockne's assets and liabilities had a collective net fair value of 500,000. Doone uses the equity

### Calculating the price of bonds in various market interest rates

3) Assume that General Motors Corporation sold an issue of bonds with a 10-year maturity, a \$1000 par value, a 10% coupon rate, and semiannual interest payments. a. Two years after these bonds were issued, the going rate on bonds such as these fell to 6%. Calculate the price at which these bonds would sell.

### Create a Hedge with the Futures Contract for Zinn Company

Chapter 23. Ch 23-06 Build a Model Problem 23-6. Use the information and data from Problem 23-5 Problem Inputs: Size of planned debt offering = \$10,000,000 Anticipated rate on debt offering = 11% Maturity of planned debt offering = 20 Number of months until debt

### Long term debt firm

Why does a firm use long-term debt? The week 3 lecture points out advantages and disadvantages of long term debt. Do the advantages of long-term debt outweigh the disadvantages? At what point is a firm over burdened with debt? Why do some large, publicly held firms have little or no long-term debt on their balance sheets?

### Future value interest factors

Use the future value interest factors in Appendix Table Aâ?"1 in each of the cases shown in the table on the facing page to estimate, to the nearest year, how long it would take an initial deposit, assuming no withdrawals, 1. To double. 2. To quadruple. Case Interest rate A 7% B 40 C 20 D 10

### Personal Finance Concepts- revolving charge account interest rate charges

Nancy Tai has recently opened a revolving charge account with MasterCard. Her credit limit is \$1000, but she has not charged that much since opening the account. Nancy hasn't had the time to review her monthly statements as promptly as she should, but over the upcoming weekend, she plans to catch up on her work. In reviewing

### Competitive Analysis and Business Cycles

Need help with using a Internet site to chart the price history of the coca cola company over the past five years (2006 - 20100. You can simply look at the purchase price in each year from 2006 and the selling price today in 2010. It is better to sort your historical stocks by clicking "monthly." After finding the stock pri

### Assessing a problem about leveraging

Leverages Mr. Jim Smith is considering the possibility of opening his own machine shop .He expects first year sales to be AED. 600,000 , and he feels that his variable costs will be approximately 50% of sales . His fixed costs in the first year will be AED. 250,000. Jim will need to raise AED 800,000 to start the busine

### Debt Capacity

You have recently acquired a family business that has no debt. You are interested in borrowing funds for other prospective acquisitions. You learn that to be able to keep your company at a level of "investment grade" and to be able to borrow at 6.5%, your operating cash flow coverage must be at least three times debt service.

### Future value calculations and tables

A, Future value calculation Without referring to tables or to the preprogrammed function on your financial calculator, use the basic formula for future value along with the given interest rate, i, and the number of periods, n, to calculate the future value interest factor in each of the cases shown in the following table.

### Interest Rates: Example Problems

Show steps to find each answer. 1. At 7.8% compounded monthly, how long would it take to accumulate \$14,000 if you started with \$10,500? Ans: 44.4 months 2. You start a RRSP on November 1, 1995 with a deposit of \$3500, you add \$2000 on Nov. 1, 1997 and \$5500 on Nov. 1, 1999. If interest is 11% p.a. compounded quarterly

### Lessee's Interest Expense

On January 1, 2004, Zale, Inc. signed a ten-year lease with annual lease payments of \$90,000 starting at the beginning of the lease term, and title passing to Zale at the expiration of the lease. The leased property has an estimated useful life of 11 years, with no salvage value. The lessee's incremental borrowing rate was 13.7%

### Problems: Simple Interest, Compound Interest, Effective Interest Rate, Geometric Sequence, Annuity, Loan, Mortgage

Find the simple interest for each loan: 1. \$15,903 at 8% for 8 months 3. \$42,368 at 5.22% for 5 months 5. For a given amount of money at a given interest rate for a given time period, does simple interest or compound interest produce more interest? Find the compound amount in each loan: 7. \$19,456.11 at 12% compounde

### Which gives better return: Savings Account with 2% interest rate OR Certificate of Deposit with 4.5% interest rate?

Take the current amount you have in your checking or savings account. Suppose you have a choice of keeping your money for five years in a savings account with a 2% interest rate, or in a five year certificate of deposit with and interest rate of 4.5%. Calculate how much interest you would earn with each option over five years