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# FV of an ordinary annuity/WACC/Project acceptance

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You retire in 25 years and you presently have \$400,000 but you estimate that you need \$1,750,000 by the time you retire. What interest rate do you need to earn to reach your goal.

What is the future value of an ordinary annuity that pays \$1000 each 6 months and pays 9.0% interest for 20 years. What if this were an annuity due.

ABC Corp had Sales of \$100,000. Their operating cost excluding depreciation totaled \$25,000. Their depreciation expense amounted to \$10,000. They had interest charges of \$5,000. They received interest payments of \$10,000. They also received dividends of\$10,000 and paid dividends of \$15,000. What is their tax liability, and their net income. Also calculate their Net Cash Flow. Use the table in your text on page 108. What is their Marginal and Average tax rate.

A 20 year, 10% semiannual coupon bond with a par value of \$1000 may be called in 4 years at a call price of \$1100. The bond sells for \$1250. Assume that the bond has just been issued. Calculate the bonds yield to maturity, the bonds current yield, the bonds capital gain/loss yield as well as the yield to call.

Stock abc has a standard deviation of 12.35% and a return of 16%. Stock xyz has a standard deviation of 14% with a return of 24%. What are their coefficient of variation and which stock is riskier.

A stock is trading at \$60 per share. They are just paid a dividend of \$4.00. The stock is expected to grow at 5.5% per year for the remainder of time. What is the required return on the stock.

ABC corp. recently hired you as a consultant to estimate the company's WACC. You have obtained the following information. (1) ABC's noncallable bonds mature in 25 years, have an 10.00% annual coupon, a par value of \$1,000, and a market price of \$1,275.00. (2) The company's tax rate is 40%. (3) The risk-free rate is 4.50%, the market return is 10%, and the stock's beta is 1.25. (4) The target capital structure consists of 35% debt and the balance as common equity. ABC corp uses the CAPM to estimate the cost of equity, and it does not expect to issue any new common stock. What is its WACC?

ABC is considering two equally risky, mutually exclusive projects, Projects A and B, that have the following cash flows: Use a WACC of 9%. Year Project A Yr 0 is 100000, Yr 1 30000, Yr 2 is 25,000 Yr 3 is 30000 and Yr 4 is 35,000. For Project B the cash flows are: Yr 0 is 100,000, Yr 1 is 30,000, Yr 2 is 15,000, Yr 3 is 80,000 and Yr 4 is 55,000. Calculate the NPV, IRR and Payback time for both projects. Which project should they take?

Year Project A Project B
0 100,000 100,000
1 30,000 30,000
2 25,000 15,000
3 30,000 80,000
4 35,000 55,000
5

ABC is also considering a project that has a forecasted sales revenue of \$30,000 and is estimated to grow by 5% every year over the life of the project which is 3 years. The initial equipment cost for the project is \$50,000 and will be depreciated using the MACRS method over its 5 year life. The equipment could be sold for \$5,000 at the end of year 3. The MACRS rates are (20% ,32%, 19.2%, 11.52%,11.52% and 5.76%). The marginal tax rate is 40%, and their cost of capital is 10%. Calculate the project's NPV, and IRR..