Question
Time Value of Money (a) Suppose you have $5,000 to invest in a savings account that offers an annual interest rate of 8%, compounded quarterly.
Time Value of Money
(a) Suppose you have $5,000 to invest in a savings account that offers an annual interest rate of 8%, compounded quarterly. Calculate the balance in the account after:
(i) 5 years
(ii) 10 years (b) Emily is considering taking out a loan from a bank. She needs $10,000 today and plans to repay it in 3 years. If the bank charges an annual interest rate of 6%, compounded annually, how much will Emily have to repay after 3 years?
(c) Calculate the time it will take for an investment of $2,500 to triple in value if it earns an annual interest rate of 12%, compounded annually.
Capital Structure and Cost of Capital
(a) A company has a target capital structure of 40% debt and 60% equity. The company's before-tax cost of debt is 7% and its cost of equity is 12%. Calculate the weighted average cost of capital (WACC) for the company.
(b) Explain the concept of the marginal cost of capital and how it is used in investment decision-making.
(c) If the company's tax rate is 30%, calculate the after-tax cost of debt and the adjusted WACC.
Financial Ratios and Analysis
(a) Calculate the current ratio and quick ratio for a company given the following information:
- Current Assets: $120,000
- Current Liabilities: $80,000
- Inventory: $40,000
(b) Interpret the results of the current ratio and quick ratio calculations in terms of the company's short-term liquidity.
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