Question 5

5.1 Frasier needs 250,000 to set up his business. Bank A is willing to lend him the money under the following conditions: the loan is to be repaid in equal instalments at the end of each of the next five years and the interest rate is 15%. How much of the third payment applies to the principal balance?

5.2 To ensure she has the necessary capital in 5 years time to set up her own business, Jane plans to deposit 9,000 per annum for 5 years, beginning on January 1st 2022. Janes savings account pays 8% p.a. compounded annually. However, at the end of the third year of her five-year planning horizon, Jane withdraws 4,000 to purchase a car. And at the end of the fourth year, she withdrew 5,000 to fund a holiday in New Zealand. Relative to the amount Jane had originally planned on savings, what was the shortfall in her savings at the end of the fifth year?

5.3 Travis & Sons has a capital structure that is based on 35 percent debt, 5 percent preferred stock, and 60 percent common stock. The pretax cost of debt is 7.8 percent and the cost of preferred stock is 9.4 percent. The firms common stock has a beta of 2.3 and the market risk premium is 5.83%. The tax rate is 21 percent and Treasury Bills offer a 3% return. A project is being considered that is equally as risky as the overall company. This project has initial costs of 250,000 and annual cash inflows of 101,000, 201,000, and 160,000 over the next three years, respectively. Based on the NPV approach, should this project be accepted? Why / why not?