Arena Corp. leased equipment from Bolton Corp. and correctly classified the lease as a finance lease. The present value of the m
1 answer:
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Answer: 18%
Explanation:
The payments that your friend will make are an annuity as they are constant. This means that the loan amount of $15,000 is the present value of the annuity.
To find the rate of return, use the factor tables.
Present value of annuity = Annuity * Present value interest factor of annuity, 14 years, ?%
15,000 = 3,000 * Present value interest factor of annuity, 14 years, ?%
Present value interest factor of annuity, 14 years, ?% = 15,000 / 3,000
Present value interest factor of annuity, 14 years, ?% = 5.0
Go to the present value of annuity factor table and find out what interest rate intersects with 14 periods such that the factor is 5.0.
That rate is 18%.
Rate of return is therefore 18%.
Answer:
a) 9.00 %
b) 7.80 %
c) yes the weight of the debt increases here is more risk in the investment as the debt payment are mandatory and failing to do so result in bankruptcy while the stock can wait to receive dividends if the income statement are good enough
d) 9.00 %
e) The increase in debt may lñead to an increase in return of the stockholders if they consider the stock riskier than before and will raise their return until the WACC equalize at the initial point beforethe trade-off occurs
Explanation:
a)
Ke 0.12
Equity weight 0.5
Kd(1-t) = after tax cost of debt = 0.06
Debt Weight = 0.5
WACC 9.00000%
c)
Ke 0.12
Equity weight 0.3
Kd(1-t) = after tax cost of debt = 0.06
Debt Weight 0.7
WACC 7.80000%
d)
<em>Ke 0.16</em>
Equity weight 0.3
Kd(1-t) = after tax cost of debt = 0.06
Debt Weight 0.7
WACC 9.00000%