Lodi Department Stores, Inc., constructs its own stores. In the past, no cost has been added to

Question:

Lodi Department Stores, Inc., constructs its own stores. In the past, no cost has been added to the asset value for interest on funds borrowed for construction. Management has decided to correct its policy and desires to include interest as part of the cost of a new store just being completed. Based on the following information, compute amount of interest that would be added to the cost of the store (1) in 2008 and (2) in 2009?

Total construction expenditures:

January 2, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 600,000

May 1, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000

November 1, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000

March 1, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700,000

September 1, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000

December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000

$3,300,000

Outstanding company debt:

Mortgage related directly to new store; interest rate, 12%; term,

5 years from beginning of construction . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000,000

General bond liability:

Bonds issued just prior to construction of store; interest rate,

10% for 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 500,000

Bonds issued prior to construction; interest rate,

8%, mature in 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000,000

Estimated cost of equity capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14%

Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...