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Oduvanchick [21]
3 years ago
14

Jake wants to purchase a new computer and go to the Caribbean for spring break. The computer is priced at $1,299, and the vacati

on is priced at $800. He has only $1,574 in his checking account, so he cannot afford to purchase both. After much thought, Jake buys the computer and writes a check for $1,299.
Identify what role money plays in each of the following parts of the story.
1. Jake can easily determine that the price of the computer is more than the price of the vacation.
2. Jake has $1,574 in his checking account.
3. Jake writes a check for $1,299.
Business
1 answer:
In-s [12.5K]3 years ago
5 0

Answer:

1. Jake can easily determine that the price of the computer is more than the price of the vacation.  ⇒ UNIT OF ACCOUNT

2. Jake has $1,574 in his checking account.  ⇒ STORE OF VALUE

3. Jake writes a check for $1,299. ⇒ MEDIUM OF EXCHANGE

Explanation:

The four functions of money are:

  1. unit of account: since money is a common denominator, it helps to assign value to different goods and services.
  2. store of value: you can save money in order to purchase gods and services in the future.
  3. medium of exchange: you can purchase and sell goods and services using. money
  4. standard of deferred payment: money allows loans that require future payments of both principal and interest.

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$607,000

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If Wild Widgets, Inc., were an all-equity company, it would have a beta of 0.9. The company has a target debt-equity ratio of .4
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Answer:

a. 6.5%

b. 13.06%

c. 10.91%

Explanation:

a.

Cost of debt of a bond is yield to maturity. Yield to maturity is the rate of return that a investor actually receives or a borrows actually pays on a bond. It is long term return or payment which is expressed in annual term.

Formula for yield to maturity is as follow

Yield to maturity = [ C + ( F - P ) / n ] / [ (F + P ) / 2 ]

By placing values in the formula

Assuming the bond face value is $1,000

Yield to maturity = [ (1000x7.2) + ( 1,000 - $1,090 ) / 20 ] / [ ( 1,000 + $1,090 ) / 2 ]

Yield to maturity = [ $72 + ( 1,000 - $1,090 ) / 20 ] / $1,045

Yield to maturity = [ $72 - $4.5 ] / $1,045

Yield to maturity = $67.5 / $1,045

Yield to maturity = 6.5%

So, the cost of Debt is 6.5%

b.

As 0.9 is the unlevered beta, We need Levered beta due to restructuring of capital.

Beta Levered = Beta Unlevered x ( 1 + ( 1 - tax rate ) x Debt / Equity)

Beta Levered = 0.9 x ( 1 + ( 1 - 0.35 ) x 0.4 )

Beta Levered = 1.134

Cost of equity can be calculated using CAPM

CAPM calculated the expected return on an equity investment based on the risk free rate, market premium and risk beta of the investment.

Formula for CAPM is as follow

Expected return = Risk free Rate + Beta ( Market premium)

As we know the Risk premium is the difference of market return and risk free rate.

Expected return = Risk free Rate + Beta ( Market Return - Risk free Rate )

Ra = Rf + β ( Rm - Rf )

Ra = 4.1% + 1.134 ( 12% - 4.1% )

Ra = 13.06%

Cost of Equity is 13.06%

c.

WACC is the average cost of capital of the firm based on the weightage of the debt and weightage of the equity multiplied to their respective costs.

According to WACC formula

WACC = ( Cost of equity x Weightage of equity )+ ( Cost of debt ( 1- t) x Weightage of debt )

Placing the values in formula

If the debt to equity 0.4  the equity value should be 1 and total capital is 1.4 ( 1 + 0.4 )

WACC = ( 13.06% x 1 / 1.4 )+ ( 6.5% ( 1- 0.35) x 0.4 / 1.4 ) = 9.71% + 1.2% = 10.91%

WACC is 10.91%

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