Reference no: EM132254986
Assignment
1. When determining the cash flow to assets start with net income, add back depreciation add the change in net working capital and subtract any capital expenditures to net income. The changes are made to net income because it's apart of the statement of cash flows. It summarizes the amount of cash and cash equivalents entering and leaving the company. Non-cash expenses like depreciation and amortization must be included in net income but the cost do not reduce the amount of cash a company generates in a given period.
2. You have two friends who want to raise capital for a brewery. They've spent their savings developing the idea, but they need a large amount of new capital to open a storefront and buy equipment. Banks have repeatedly denied their applications for large loans. They've approached wealthy family members and friends with very little luck. Why aren't banks accepting their loan applications? If they're willing to pay a high rate of return for funds. What's another option you can suggest?
3. Assuming typical discount rates of less than 30 percent, rank the following from highest to lowest present value, and then briefly explain each one. (Hint you shouldn't have to make any calculations to determine the answer think of the definitions of each.
-An ordinary annuity of five payments $50
-An annuity due of five payments of $50
-A perpetuity of $50
4. Assume that a project has an internal rate of return of 21 percent and a discount rate of 20 percent. Would you expect the NPV of the project to be positive or negative? Should the firm accept the project? Discuss the resulting NPV when the IRR is below the discount rate and when the IRR is equal to the discount rate.
5. Recall the three different investment criterion: the payback period, net present value (NPV), and internal rate of return (IRR). Compare and contrast these techniques. How do we know when to accept or reject an investment? Discuss some advantages and disadvantages (if applicable) to each.
6. You would like to borrow $10,000.00 at an interest rate of 8% per year for five years. You agree to make interest and principal payments totaling $2,401.49 at the end of the year. Prepare a loan amortization schedule for each of the five years, showing the beginning principal balance, the total payment of $2,401.49, the interest component of the payment, the principal component of the payment, and the ending principal balance.
A. Fill in the blank spaces in the following table to complete your answer.
For a loan of $10,000 at 8% interest for over 5 years.
|
Year
|
Beginning Balance
|
Total Payment
|
Interest Paid
|
Principal Paid
|
Ending Balance
|
|
1
|
$10,000
|
$2,401.49
|
|
|
|
|
2
|
|
$2,401.49
|
|
|
|
|
3
|
|
$2,401.49
|
|
|
|
|
4
|
|
$2,401.49
|
|
|
|
|
5
|
|
$2,401.49
|
|
|
|
|
Total
|
|
$12,007.45
|
|
$10,000
|
|
B. Explain what happens to the amount paid toward interest and principal over the life of the loan.
7. What's the WACC? What's the formula for determining the weighted average cost of capital? Discuss how to calculate or find each variable. For example The return on debt can be measured by the ---- on the firm's long-term bonds. Discuss both methods of determining the cost of equity.
Finally, how can making changes to the capital structure maximize the value of the firm? Hint How does the capital structure relate to the WACC, and how does the WACC relate to the discount rate used in a net present value computations (NPV).