Reference no: EM132750240

Questions -

Q1. You have won the lottery and have a choice between a) a $12,000,000 cash upfront payment or b) a series of payments of $310,000 per year for 35 years and with an additional one-time $4,000,000 lump sum payment at the end of 35 years.

1) Which is the better outcome and by how much in today's dollars? (Ignore taxes - these payments are tax free) You believe that interest rates will be 2.5% throughout the full period.

2) What should the annual payments be for you to be indifferent between each option?

Q2. A firm with existing debt of $6.0 million at a cost of 7% wants to raise more debt to finance a plant expansion of $10.0 million. The bank would be willing to lend the firm additional funds, only if the firm can keep its EBIT/Interest Coverage multiple at or below 3.0X. The firm's tax rate is 40%.

1: Show your work to show how much additional debt the firm could raise at an interest rate of 8% and still keep its coverage multiple at no more than 3.0 times.

2: How much debt could the company raise if the interest rate of the new debt was 10% instead of 8%? The firms existing EBIT is $5.0 million.

3: Under both the new debt scenarios (above), can the company go forward with the $10 million plant expansion. Please explain your answer - don't just answer yes or no.