Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

1- A brilliant young scientist is killed in a plane crash. It is anticipated that he could have earned $220,000 a year for the next

1- A brilliant young scientist is killed in a plane crash. It is anticipated that he could have earned $220,000 a year for the next 25 years. The attorney for the plaintiff's estate argues that the lost income should be discounted back to the present at 5 percent. The lawyer for the defendant's insurance company argues for a discount rate of 13 percent.

What is the difference between the present value of the settlement at 5 percent and 13 percent? Compute each one separately(Do not round intermediate calculations. Round your answers to 2 decimal places.)

Present Value

PV at 5% rate _______

PV at 13% rate _______

Difference$ ______

2- Airborne Airlines Inc. has a $1,000 par value bond outstanding with 10 years to maturity. The bond carries an annual interest payment of $84 and is currently selling for $890. Airborne is in a 30 percent tax bracket. The firm wishes to know what the aftertax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as the yield to maturity on the old issue because the risk and maturity date will be similar.

a.Compute the yield to maturity on the old issue and use this as the yield for the new issue.(Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Yield on new issue________%

b.Make the appropriate tax adjustment to determine the aftertax cost of debt.(Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Aftertax cost of debt________%

3- The Nolan Corporation finds it is necessary to determine its marginal cost of capital. Nolan's current capital structure calls for 45 percent debt, 15 percent preferred stock, and 40 percent common equity. Initially, common equity will be in the form of retained earnings (Ke) and then new common stock (Kn). The costs of the various sources of financing are as follows: debt, 8.2 percent; preferred stock, 6 percent; retained earnings, 15 percent; and new common stock, 16.2 percent.

a.What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained earnings,Ke.)(Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

Weighted Cost

Debt__________%

Preferred stock________

Common equity________

Weighted average cost of capital________%

b.If the firm has $30 million in retained earnings, at what size capital structure will the firm run out of retained earnings?(Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").)

Capital structure size (X)_________ million

c.What will the marginal cost of capital be immediately after that point? (Equity will remain at 40 percent of the capital structure, but will all be in the form of new common stock,Kn.)(Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Marginal cost of capital__________%

d.The 8.2 percent cost of debt referred to earlier applies only to the first $54 million of debt. After that, the cost of debt will be 9.5 percent. At what size capital structure will there be a change in the cost of debt?(Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").)

Capital structure size (Z)_________ million

e.What will the marginal cost of capital be immediately after that point? (Consider the facts in both partscandd.)(Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Marginal cost of capital__________%

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Options Futures and Other Derivatives

Authors: John C. Hull

10th edition

013447208X, 978-0134472089

More Books

Students also viewed these Finance questions