1. Robert recently borrowed $20,000 to purchase a new car. The car loan is fully amortized over 4 years. In other words, the loan has a fixed monthly payment, and the loan balance will be zero after the final monthly payment is made. The loan has a nominal interest rate of 12 percent with monthly compounding. Looking ahead, Robert thinks there is a chance that he will want to pay off the loan early, after 3 years (36 months). What will be the remaining balance on the loan after he makes the 36th payment? (Please show with the Time Line and formulas)
a. $7,915.56
b. $5,927.59
c. $4,746.44
d. $4,003.85
e. $5,541.01
2. Company A (100% equity) is valued at $15,000,000 and Company B (which has $3,000,000 in long debt with an interest rate of 8%). The tax rate is 30%. Both A & B have identical after-tax profit $1,200,000 and it is given that both have identical operating risk profile and identical pretax income. Calculate:
(a) Value of B
(b) Capital Structure Mix of B
(c) Cost of capital for A & B