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accounts-Time Value of Money and Cost of Capital




Question;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 $90,000 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 16% 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?


Paper#42447 | Written in 18-Jul-2015

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