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

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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"?

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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Please see attached file
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.

$2.19
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Both the future and present value of a sum of money are based on?

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Both the future and present value of a sum of money are based on?
Interest rate
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What is an annuity?
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A series of unequal but consecutive payments
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Cannot be determined
Why is time value of money an important finance concept?
It takes risk into account
It takes time into account
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All of the above mentioned
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More than a dollar
Equal to a dollar
Less than a dollar
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All of the above mentioned
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Present value of an annuity
Present value of a lump sum
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Stayed the same
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Risk premium
Real rate of return
None of the above mentioned
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Zero
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The coupon payment
None of the above mentioned
What focuses on long-term decision making regarding the acquisition of projects?
Working capital management
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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?
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Who has a claim to the residual income of the firm?
Bondholders
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What voting elects a member of the board of directors of a firm with a 51% vote?
Cumulative
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Cumulative
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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
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