Project 1: Mortgage Loan Analysis: Mr. Davidson plans to buy a new house in October 2013. The sale price of the house is $436,000. He plans to pay 20% down payments and borrow additional 80% from Bank of America with a 15-year, 3.875% fixed-rate mortgage loan. He is expected to pay an equal monthly payment starting from November 2013 for 15 years.
a) Compute the required monthly mortgage payment for Mr. Davidson.
b) Construct the 2013-2015 amortization tables (26 months) for Mr. Davidson.
c) Mr. Davidson should make his 2013 tax filings in early 2014. Please calculate the total mortgage interest payments which he can use for his 2013 tax deductions.
Project 2: Capital Budgeting Analysis: The MS Energy Corp. is planning a new investment project that is expected to yield cash inflows of $185,000 per year in Years 1 via 2, $220,000 per year in Years 3 via 6, and $198,000 in Years 7 via 9. This investment will cost the company $790,000 today (initial outlay). We suppose that the firm's cost of capital is 6.8%.
a) Draw a time line to show the cash flows of the project.
b) Calculate the project’s payback period, net present value (NPV), profitability index (PI), and internal rate of return (IRR).
c) Describe whether the project must be taken.
Project 3: Weighted Average Cost of Capital: Find 2012 financial statements and other financial data (example: beta) for Caterpillar (Stock ticker: CAT) from Yahoo! Finance, Google Finance, UHV Mergent Online database, or other sources.
a) Estimate the company’s weights of capital (debt, preferred stock and common stock).
b) Estimate the company’s before-tax and after-tax component cost of debt.
c) Estimate the firm’s component cost of preferred stock.
d) Estimate the component cost of common equity by using CAPM.
e) Calculate the firm’s weighted average cost of capital (WACC).