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##### Time Value of Money and Cost of Capital

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Question;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?

Paper#48871 | Written in 18-Jul-2015

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