Questions with Answer in Excel Sheet

  1. How long does it take for the following to happen? $450 grows into $725.50 at 12% compounded monthly.            
  2. How long does it take for the following to happen? $5,000 grows into $6724.44 at 10% compounded quarterly.  
  3. How long does it take for the following to happen? $856 grows into $1,122 at 7%.                                   
  4. Find out present value when interest rate is 18%. Effective interest rate is 19.56% and future value is $10,000 and time period is 3 years.
  5. The Lexington Property Development Company has a $10,000 note receivable from a customer due in three years. How much is the note worth today if the interest rate is 7% compounded continuously?                                
  6. The Lexington Property Development Company has a $10,000 note receivable from a customer due in three years. How much is the note worth today if the interest rate is 9%?                                                             
  7. What interest rates are implied by the following lending arrangements? You borrow $500 and repay $555 in one year?                                 
  8. What interest rates are implied by the following lending arrangements? You lend $750 and are repaid $1,114.46 in five years with quarterly compounding.                                                                                                
  9. What will a deposit of $4,500 left in the bank be worth under the following conditions: Left for five years at 8% compounded quarterly?
  10.  What will a deposit of $4,500 left in the bank be worth under the following conditions: Left for six years at 10% compounded semiannually?       

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Cost of Capital Mini Case: Cascade Water Company

English: Cost-Volume-Profit diagram, decomposi...

Source Book : Corporate Finance: Linking Theory to What Companies Do By John Graham, Scott B. Smart, William L. Megginson

Chapter 9: Cost of Capital and Project Risk

Mini Case

Cascade Water Company (CWC) currently has 30,000,000 shares of common stock out- standing that trade at a price of $42 per share. CWC also has 500,000 bonds outstanding that currently trade at $923.38 each. CWC has no preferred stock outstanding and has an equity beta of 2.639. The risk-free rate is 3.5%, and the market is expected to return 12.52%. The firm’s bonds have a 20-year life, a $1,000 par value, a 10% coupon rate and pay interest semi-annually.

CWC is considering adding to its product mix a “healthy” bottled water geared toward children. The initial outlay for the project is expected to be $3,000,000, which will be depreciated using the straight-line method to a zero salvage value, and sales are expected to be 1,250,000 units per year at a price of $1.25 per unit. Variable costs are estimated to be $0.24 per unit, and fixed costs of the project are estimated at $200,000 per year. The project is expected to have a 3-year life and a terminal value (excluding the operating cash flows in year 3) of $500,000. CWC has a 34% marginal tax rate. For the purposes of this project, working capital effects will be ignored. Bottled water targeted at children is expected to have different risk characteristics from the firm’s current products. Therefore, CWC has decided to use the “pure play” approach to evaluate this project. After researching the market, CWC managed to find two pure-play firms. The specifics for those two firms are: