/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Q44BP Larry Davis borrows $80,000 at 1... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 4: Q44BP (page 285)

Larry Davis borrows $80,000 at 14 percent interest toward the purchase of a home. His mortgage is for 25 years.

a.How much will his annual payments be? (Although home payments are usually on a monthly basis, we shall do our analysis on an annual basis for ease of computation. We will get a reasonably accurate answer.)

b.How much interest will he pay over the life of the loan?

c.How much should he be willing to pay to get out of a 14 percent mortgage and into a 10 percent mortgage with 25 years remaining on the mortgage?

Assume current interest rates are 10 percent. Carefully consider the timeb value of money. Disregard taxes.

Short Answer

Expert verified

a. $11,640

b. $211,000

c. $8,813.40

Step by step solution

01

Part a

Annualpayment=LoanValue[1-1(1+r)n]r=$80,000[1-1(1+0.14)25]0.14=$80,0006.873=$11,640

02

Part b

TotalInterestPayment=(Annualpayment脳Loanlife)-LoanAmount=($11,640脳25)-$80,000=$291,000-$80,000=$211,000

03

Part c

Annualpayment=LoanValue[1-1(1+r)n]r=$80,000[1-1(1+0.10)25]0.10=$80,0009.077=$8,813.50

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Question:In computing the cost of capital, do we use the historical costs of existing debt and equity or the current costs as determined in the market? Why?(LO11-3)

KeySpan Corp. is planning to issue debt that will mature in 2035. In many respects, the issue is similar to currently outstanding debt of the corporation. a. Using Table 11-3, identify the yield to maturity on similarly outstanding debt for the firm in terms of maturity. b. Assume that because the new debt will be issued at par, the required yield to maturity will be 0.15 percent higher than the value determined in part a. Add this factor to the answer in a. (New issues sold at par sometimes requirea slightly higher yield than older seasoned issues because there are fewer tax advantages and more financial leverage that increase company risk.) c. If the firm is in a 30 percent tax bracket, what is the aftertax cost of debt?

Using Table 10-2:

a. Assume the interest rate in the market (yield to maturity) goes down to 8 percent for the 10 percent bonds. Using column 2, indicate what the bond price will be with a 10-year, a 15-year, and a 20-year time period.

b. Assume the interest rate in the market (yield to maturity) goes up to 12 percent for the 10 percent bonds. Using column 3, indicate what the bond price will be with a 10-year, a 15-year, and a 20-year period.

c. Based on the information in part a, if you think interest rates in the market are going down, which bond would you choose to own?

d. Based on information in part b, if you think interest rates in the market are going up, which bond would you choose to own?

Sheila Goodman recently received her MBA from the Harvard Business School. She has joined the family business, Goodman Software Products Inc., as vice president of finance.

She believes in adjusting projects for risk . Her father is somewhat skeptical but agrees to go along with her. Her approach is somewhat different than the risk-adjusted discount rate approach, but achieves the same objective.

She suggests that the inflows for each year of a project be adjusted downward for lack of certainty and then be discounted back at a risk-free rate. The theory is that the adjustment penalty makes the inflows the equivalent of riskless inflows, and therefore a risk-free rate is justified.

A table showing the possible coefficient of variation for an inflow and the associated adjustment factor is shown next:

Coefficient of Variation Adjustment Factor

0鈥�0.25 0.90

0.26鈥�0.50 0.80

0.51鈥�0.75 0.70

0.76鈥�1.00 0.60

1.01鈥�1.25 0.50

Assume a \(184,000 project provides the following inflows with the associated coefficients of variation for each year:

Year Inflow Coefficient of Variation

1 \)32,200 0.12

2 59,500 0.28

3 79,900 0.45

4 59,200 0.79

  1. 65,600 1.15

A Fill in the following table:

Year Inflow Coefficient of Variation Adjustment Factor Adjusted Inflow

1 \(32,200 0.12

2 59,500 0.28

3 79,900 0.45

4 59,200 0.79

5 65,600 1.15

b. If the risk-free rate is 5 percent, should this \)184,000 project be accepted? Compute the net present value of the adjusted inflows

North Pole Cruise Lines issued preferred stock many years ago. It carries a fixed dividend of $6 per share. With the passage of time, yields have soared from the original 6 percent to 14 percent (yield is the same as required rate of return).

a. What was the original issue price?

b. What is the current value of this preferred stock?

c. If the yield on the Standard & Poor鈥檚 Preferred Stock Index declines, how will the price of the preferred stock be affected?
See all solutions

Recommended explanations on Business Studies Textbooks

Managers

Read Explanation

Operational Management

Read Explanation

Managerial Economics

Read Explanation

Sales in Business

Read Explanation

Project Planning & Management

Read Explanation

Strategic Analysis

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.