You are considering opening a premium lemonade stand on the corner of Main and Anywhere Street in

your hometown.

You have determined that you will need $$1,025$ to buy equipment, a table, two chairs and other sundry

items to get started. You$$ll also need $$250$ in the bank to make change with customers and purchase

lemonade drink mix in a variety of flavours, including traditional lemonade, strawberry, cherry and grape

flavours. Each cup of lemonade that you sell will be priced at $$9\mathrm{.}99($after all this lemonade is made from

your grandmother$$s secret recipe$).$

Sales in year $1$ are estimated to be $100$ cups, and you predict that sales will rise by $20\%$ annually between

in years $2$ and $5.$ Direct materials costs are estimated to be $50\%$ of annual sales and direct labour costs

$20\%$ of annual sales.

Fixed preparation costs will be $$250$ annually.

You are financing the business with a single $$500$ par value bond issued to your parents at a price of $135.$

The bond has a $10\%$ coupon rate, and a term of $5$ years. You have also issued $600$ common shares to

other family members at a price of $$1$ per share.

You recently read in the Times of Anywhere $($a local newspaper$)$ that risk free investments are offering an

$8\%$ return, and that the beta on lemonade stands is $\mathrm{.}80.$ The expected return in the premium lemonade

market is $10\%.$

You have also confirmed with your accounting professor that the company$$s tax rate will be $10\%,$ and the

depreciation rate on lemonade stands is $15\%.$

Finally, your research has also determined that lemonade stands are predicted to have a perpetual growth

rate of $2\%$ after the first five years of operation.

Your parents paid you $$\_\_\_\_\_$ cash for the bond you issued to them.

a$.$ $$675$

b$.$ $$500$

c$.$ $$375$

d$.$ $$100$d$.$

The after$-$tax cost $($after$-$tax interest rate$)$ of the bond that you issued to your parents is $\_\_\_\_\_\%.$

a$.10\mathrm{.}50\%$

b$.9\mathrm{.}60\%$

c$.2\mathrm{.}26\%$

d$.2\mathrm{.}51\%$

What is your lemonade stand$$s weighted average cost of capital $($WACC$)?$

a$.2\mathrm{.}00\%$

b$.6\mathrm{.}00\%$

c$.5\mathrm{.}71\%$

d$.2\mathrm{.}51\%$

Assuming an internal rate of return of $10\%,$ and a WACC of $7\%,$ by how much would interest rates have to

rise for your lemonade stand to be unprofitable?

a$.17\mathrm{.}00\%$

b$.3\mathrm{.}00\%$

c$.7\mathrm{.}00\%$

d$.15\mathrm{.}00\%$