Question 1: Your company is considering two mutually exclusive investment options. Each involves an initial investment of $250,000. Option A is a bit more risky than option, therefore the discount rate for Option A is 15% and the discount rate for Option B is 12%. The cash flows are as follows:
Year Option A Option B
1 $50,000 $75,000
2 $50,000 $75,000
3 $125,000 $75,000
4 $100,000 $75,000
5 $75,000 $75,000
a) What is the payback period of each option? (round to the nearest month)
b) What is the net present value of each option?
c) Which option would you choose? Why?
Question 2: You invest $15,000 each year for 20 years at 10 percent.
a) What is the value after 20 years?
b) What is the present value of the amount calculated in (a) above, if inflation is expected to average 3% per year for the next 20 years?
Calculate the weighted average cost of capital (to the nearest tenth of a percent) given the following assumptions:
Ideal Capital Structure:
Debt 20%
Preferred Stock 30%
Common Equity 50%
Other Information
Tax Rate 40%
Growth Rate 12%
Common Price $15.00
Common Dividend $.45
Preferred Price $52.00
Preferred Dividend $3.00
Preferred Flotation Cost $2.00
Bond Yield 8%