Problem 1: Calculating Annuity Present Value. An investment offers $4,500 per year for 15 years, with the first payment occurring 1 year from now. If the required return is 10 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years? Forever?
Problem 2: Calculating Loan Payments. You want to buy a new sports coupe for $62,500, and the finance office at the dealership has quoted you an 8.2 percent APR loan for 60 months to buy the car. What will your monthly payments be? What is the effective annual rate on this loan?
Problem 3: Calculating Annuity Future Values. You are to make monthly deposits of $250 into a retirement account that pays 11 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 30 years?
Problem 4: Break-Even EBIT. Kyle Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Kyle would have 800,000 shares of stock outstanding. Under Plan II, there would be 320,000 shares of stock outstanding and $10 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.
a. If EBIT is $1.5 million, which plan will result in the higher EPS?
b. If EBIT is $5 million, which plan will result in the higher EPS?
c. What is the break-even EBIT?
Problem 5: Break-Even EBIT and Leverage. Betts Co. is comparing two different capital structures. Plan I would result in 2,000 shares of stock and $40,000 in debt. Plan II would result in 4,000 shares of stock and $20,000 in debt. The interest rate on the
debt is 10 percent.
a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $5,000. The all-equity plan would result in 6,000 shares of stock outstanding. Which of the three plans has the highest EPS? The lowest?
b. In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? Is one higher than the other? Why?
c. Ignoring taxes, when will EPS be identical for Plans I and II?
d. Repeat parts (a), (b), and (c) assuming that the corporate tax rate is 38 percent.
Are the break-even levels of EBIT different from before? Why or why not?