Reference no: EM13917297
1) Suppose that you have been placed in charge of calculating the user cost of capital for a corporation. You know that capital costs are debt-financed at the margin and you have the following additional information (the time period is a year, and all percentages have been translated into fractions, i.e., a 10% interest rate is written as .1):
before-tax interest rate paid by the corporation = .1
depreciation rate (denoted δ in class) = .05
a) In the absence of taxes, what is the user cost of capital? (Give a number, and make sure that you show all of your calculations.)
For the remaining questions, assume that corporate income is taxed at a 50% rate. (Assume no investment tax credits.)
b) If the firm is allowed no tax deductions for any of the costs associated with capital investments, then what is the user cost of capital?
c) If the firm is allowed to deduct both interest payments and actual economic depreciation from its taxable income, then what is the user cost of capital?
(d) If the firm is allowed to expense its capital investments but is not allowed to deduct interest payments, then what is the user cost of capital?
|
Charges an annual percentage rate of prime rate plus
: Chase has a $42,500 line of credit which charges an annual percentage rate of prime rate plus 5%. His starting balance on June 1 was $2,550. On June 4 he borrowed $5,300. On June 9, Chris made a payment of $800, and on June 17 he borrowed $5,600. If ..
|
|
What must be the coupon rate on the bonds
: Large Industries bonds sell for $1,096.52. The bond life is 11 years, and the yield to maturity is 7.2%. What must be the coupon rate on the bonds? Assume coupons are paid once a year and the face value is $1,000.
|
|
What are the key differences between risk and uncertainty
: The fact that risk and uncertainty are experienced differently might matter in times of financial crisis. What are the key differences between risk and uncertainty? Discuss.
|
|
Direct methods of preparing the statement of cash flows
: What are the differences between the indirect and direct methods of preparing the statement of cash flows? Do you agree with the FASB that the direct method is preferred? Why, or why not?
|
|
Charge of calculating the user cost of capital
: Suppose that you have been placed in charge of calculating the user cost of capital for a corporation. You know that capital costs are debt-financed at the margin and you have the following additional information. In the absence of taxes, what is the..
|
|
What is the marginal cost of borrowing if the loan
: A bank offers two 30 year, fixed rate, fully amortizing LPMs: an 85% LTV loan at 6%, and an 80% LTV loan at 5.5%. What is the marginal cost of borrowing if the loan is going to be held for 10 years?
|
|
What must be the opportunity cost of capital
: A stock sells for $20. The next dividend will be $3 per share. If the return on equity ROE is a constant 10% and the company reinvests 30% of earnings in the firm, what must be the opportunity cost of capital?
|
|
What is the current value of the companys stock
: JJ Industries will pay a regular dividend of $1.30 per share for each of the next four years. At the end of the four years, the company will also pay out a $44 per share liquidating dividend, and the company will cease operations. If the discount rat..
|
|
Deciding whether to add bard publishing to your portfolio
: You are deciding whether to add Bard Publishing to your portfolio, but you are concerned about your projection for their growth rate. Bard's cost of equity capital (the discount rate for equity) is known to be 9% and they just paid a dividend of $4.7..
|