Week 5 (Textbook Assignment 3) Time Value of Money (Chp 9) and Cost of Capital;(Chp 11) Version A;1. Future Value and Annuity Payments Christy and Michael are trying to decide if;they will have enough money to retire early in 15 years, at age 60. Their current;assets are $250,000 in retirement plans and they have $80,000 in other;investments. Together, they contribute $30,000 per year to their retirement plans;and another $6,000 to other investments.;a. If their assets grow at 9 percent per year, how much money will they have;when they turn 60?;b. After they retire, they will invest their wealth more conservatively and it will;earn 6 percent per year. What will be the amount of their annual payments if;they expect to live for 30 years in retirement?;2. Cost of Capital (WACC). Suppose your company has decided to use a divisional;WACC approach to analyze projects. The firm currently has 2 divisions, A and B, with;betas for each division of 0.5 and 1.5, respectively. If all current and future projects will;be financed with half debt and half equity, and if the current cost of equity (based on an;average firm beta of 1.0 and a current risk-free rate of 5%) is 14% and the after-tax yield;on the company's bonds is 6%, what are the WACCs for divisions A and B? Hint: First;Solve for Market Risk Premium (MRP). MRP = (Km-Rf);a. Division A WACC?;b. Division B WACC?
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