# The Time Value of Money, Cost of Capital, Trade Discount, NPV

1. You lend a friend $15,000, for which your friend will repay you $37,313 at the end of five years. What interest rate are you charging your "friend"?

2. You plan to buy some property in Florida five years from today. To do this, you estimate that you will need $20,000 at that time for the purchase. You would like to accumulate these funds by making equal annual deposits in your savings account, which pays 12 percent annually. If you make your first deposit at the end of this year, and you would like your account to reach $20,000 when the final deposit is made, what will be the amount of your deposits?

3. The target capital structure for Jowers Manufacturing is 50 percent common stock, 15 percent preferred stock, and 35 percent debt. If the cost of common equity for the firm is 20 percent, the cost of preferred stock is 12 percent, and the before-tax cost of debt is 10 percent, what is Jower's cost of capital? The firm's marginal tax rate is 34 percent.

4. If a firm buys on trade credit terms of 2/10, net 60 and decides to forgo the trade credit discount and pay on the net day, what is the effective annualized cost of forgoing the discount?

5. Mo-Lee's Sportswear is considering building a new factory to produce soccer equipment. This project would require an initial cash outlay of $10,000,000 and will generate annual free cash inflows of $2,500,000 per year for eight years. Calculate the project's NPV given:

a. A required rate of return of 9 percent

b. A required rate of return of 11 percent

c. A required rate of return of 13 percent

d. A required rate of return of 15 percent

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1. You lend a friend $15,000, for which your friend will repay you $37,313 at the end of five years. What interest rate are you charging your "friend"?

r= 20.00% =(37313/15000)^(1/5)-1

^ stands for raised to the power of

Answer: 20.00%

2. You plan to buy some property in Florida five years from today. To do this, you estimate that you will need $20,000 at that time for the purchase. You would like to accumulate these funds by making equal annual deposits in your savings account, which pays 12 percent annually. If you make your first deposit at the end of this year, and you would like your account to reach $20,000 when the final deposit is made, what will be the amount of your deposits?

n= 5

r= 12.00%

FVIFA (5 periods, 12.% rate ) = 6.352847

Future value= $20,000

Therefore, annuity= $3,148.19 =20000/6.352847

Answer: $3,148.19

(FVIFA=Future Value Interest Factor for an annuity)

3. The target capital structure for Jowers Manufacturing is 50 percent common stock, 15 percent preferred stock, and 35 percent debt. If the cost of common equity for the firm is 20 percent, the cost of preferred stock is 12 percent, and the before-tax cost of debt is 10 percent, what is Jower's cost of capital? The firm's ...

#### Solution Summary

Answers questions on Time Value of Money, Cost of Capital, Trade Discount, NPV.

Both the future and present value of a sum of money are based on?

These are questions that I cannot seem to find the answer to. Any sort of help would be greatly appreciated!

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Both the future and present value of a sum of money are based on?

Interest rate

Number of time periods

Both interest rate and number of time periods

None of the above mentioned

What is an annuity?

More than one payment

A series of unequal but consecutive payments

A series of equal and consecutive payments

A series of equal and non-consecutive payments

If you have $1000 and you plan to save it for 4 years with an interest rate of 10% what is the future value of your savings?

1464.00

1000.00

1331.00

Cannot be determined

Why is time value of money an important finance concept?

It takes risk into account

It takes time into account

It takes compound interest into account

All of the above mentioned

The present value of a dollar to be received in the future is

More than a dollar

Equal to a dollar

Less than a dollar

None of the above mentioned

In valuing a financial asset, you use these variables

Present value of future cash flows

Discount rate

Required rate of return

All of the above mentioned

The principal amount of a bond at issue is called

Par value

Coupon value

Present value of an annuity

Present value of a lump sum

If a bond's value rises above its par value during its life, interest rates have

Gone up

Gone down

Stayed the same

There is no correlation with interest rates

The basic "rent" that you are charged when you borrow money is called

Inflation premium

Risk premium

Real rate of return

None of the above mentioned

As time to maturity draws near, a bond's value approaches

Zero

Par

The coupon payment

None of the above mentioned

What focuses on long-term decision making regarding the acquisition of projects?

Working capital management

Capital budgeting

Cash budgeting

None of the above mentioned

Since capital budgeting uses cash flows instead of accounting flows, the financial manager must add back what to the analysis?

The cost of fixed assets

The cost of accounts payable

Investments

Depreciation

Which capital budgeting method focuses on firm liquidity?

Payback method

Net present value

Internal rate of return

None of the above mentioned

Which of the following capital budgeting methods states the return of a project as a percentage?

Payback period

Net present value

Internal rate of return

None of the above mentioned

Which of the following capital budgeting methods is the least theoretically correct?

Payback method

Net present value

Internal rate of return

None of the above mentioned

Who has a claim to the residual income of the firm?

Bondholders

Preferred stockholders

Common stockholders

None of the above mentioned

What voting elects a member of the board of directors of a firm with a 51% vote?

Cumulative

Preferred

Majority

None of the above mentioned

Which of the following types of voting includes minority shareholders?

Cumulative

Preferred

Majority

None of the above mentioned

If a corporate charter says that current stockholders must be give the first option to purchase new stock, what kind of rights offering is that?

Pre-emptive

Rights-on

Ex-rights

None of the above mentioned

When a rights offering is announced, the stock initially trades

Ex-rights

Rights-on

No-rights

Pre-emptive right

The Board of Directors may do which of the following with net income

Put it in the cash account

Retain it

Pay it out as dividends

Retain it and pay it out as dividends

One desire of stockholders regarding dividend policy is

Stable dividends

Frequent dividends

Low dividends

High Dividends

A stock dividend

Increases the value of stockholder's equity

Decreases the value of stockholder's equity

Does not change the value of stockholder's equity

None of the above mentioned

The purpose of a stock spilt is usually to

Increase the investor's wealth

Bring down the stock price into a lower trading range

Reduce the threat of takeover

Decrease the number of shares outstanding

As a result of the Jobs and Growth Tax Relief Act of 2003, dividends and capital gains are taxed at a maximum rate of

38.6%

20%

15%

None of the above rates

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