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Chapter 4: Q10BP-b (page 282)
How much would you have to invest today to receive b. $20,000 in 12 years at 13 percent?
An investor has to invest $4,614.12 today in order to receive $20,000 in 12 years.
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Question:How does the cost of a source of capital relate to the valuation concepts presented previously in Chapter 10? (LO11-3)
What are the three factors that influence the required rate of return by investors?
Terrier Company is in a 40 percent tax bracket and has a bond outstanding that yields 10 percent to maturity. a. What is Terrier’s aftertax cost of debt? b. Assume that the yield on the bond goes down by 1 percentage point, and due to tax reform, the corporate tax rate falls to 25 percent. What is Terrier’s new aftertax cost of debt? c. Has the aftertax cost of debt gone up or down from part a to part b? Explain why
You will receive \(6,800 three years from now. The discount rate is 10 percent. a. What is the value of your investment two years from now? Multiply \)6,800 3 (1/1.10) or divide by 1.10 (one year’s discount rate at 10 percent).
The Clearinghouse Sweepstakes has just informed you that you have won \(1 million. The amount is to be paid out at the rate of \)20,000 a year for the next 50 years. With a discount rate of 10 percent, what is the present value of your winnings?
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