Sam Jones has an engineering firm. He wants to build a new headquarters building. The building will cost $1,500,000. He will finance the entire building himself, even though bank financing is at prime plus 2 percent. The prime lending rate is currently 8.5 percent. Sam will withdraw the money for the building from his mutual fund account where he has earned 13 percent for the last ten years. What is Sam's weighted average cost of capital?

Sam Jones has an engineering firm. He wants to build a new headquarters building. The building will cost $1,500,000. He will finance the entire building himself, even though bank financing is at prime plus 2 percent. The prime lending rate is currently 8.5 percent. Sam will withdraw the money for the building from his mutual fund account where he has earned 13 percent for the last ten years. What is Sam's weighted average cost of capital?

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter13: Investing In Mutual Funds, Etfs, And Real Estate

Section: Chapter Questions

Problem 9FPE

See similar textbooks

Similar questions

A) Rick is thinking about quitting his current job, which pays a salary of $54,000 per year, to own and operate his own business. If he starts the business, he expects to spend $230,000 to purchase physical capital. This amount of money would come from two sources: $110,000 from a bank loan at an interest rate of 7% per year and $120,000 from Rick's savings, which are currently invested in stocks that are equally risky as his intended business and earning 11% per year. The physical capital is expected to have useful life of 10 years and a scrap value of $25,000. Rick expects to spend $130,000 per year on assistants and to pay himself a salary of $23,000 per year while operating his business. His business is expected to earn total revenues of $260,000. After learning that Rick might quit, his employer offers him a salary of $62,000 per year to convince him to stay at his current job. The expected annual accounting profit of Rick's intended business is $__________ B) Rick is thinking…
Iris intends to invest in a new clothing line and needs a total of K250,000 as start-up capital. She intends to raise 70% of her capital through ordinary share investors and 30% through a bank loan facility. Her investors will require a 20% return on their investment and the bank will charge her interest of 25%. Given a tax rate of 35%. Calculate the weighted average cost of capital.
Dawn is preparing a home office to perform subcontract projects for midsized architect firms. She plans to use $13,000 of her own funds, which currently generate a return of 4% per year. The remainder of financing will be provided by a $9,000 bank loan carrying a 9% per year interest rate. She hopes to realize a return of 3% above the average cost of capital to establish her office, and she realizes that the factors of inflation and risk should also be considered. Her decision is to add another 1.5% per year to compensate for these elements. What is the MARR she should use when evaluating projects? the Marr she should use is __%
An investor is looking at building a factory to make gizmos. He estimates that it would cost $150,000 to build this factory from scratch. He reckons that his returns from the sale of gizmos would be $20,000 at the end of year 1, 35,000 in year 2, 40,000 in year 3, 60,000 in year 4 and 75,000 in year 5. The bank currently offers an interest rate of 8% on loans. The investor does his calculations and goes to present his proposal to the bank manager. Would the bank manager approve the loan? Why? Calculate the investor's exact MEC? Make sure to show every step in the calculations to get full marks. Round off to whole numbers.
Joe Morton buys a piece of equipment for $200,000. He puts down $40,000and finances $160,000. Joe’s opportunity cost is 4 percent, and the lender’sinterest rate is 8 percent. Find the weighted average cost of capital (WACC).
The amount the bank is willing to loan you to start your business is not enough to cover the initial investment you need to make. You need an additional $10,000. You approach an investor and ask him to invest $10,000 in your business. In return, you offer to pay him $500 out of your profits at the end of years 1-4 and an amount X at the end of year 5. The investor's annual cost of funds is 10%. How big must X be to induce him to invest in your business?
Bill Clinton reportedly was paid an advance of $10.0 million to write his book My Life. Suppose the book took three years to write. In the time he spent writing, Clinton could have been paid to make speeches. Given his popularity, assume that he could earn $7.8million a year (paid at the end of the year) speaking instead of writing. Assume his cost of capital is 10.2%per year. a. What is the NPV of agreeing to write the book (ignoring any royalty payments)? b. Assume that, once the book is finished, it is expected to generate royalties of $4.8 million in the first year (paid at the end of the year) and these royalties are expected to decrease at a rate of 30% per year in perpetuity. What is the NPV of the book with the royalty payments?
Bill Clinton reportedly was paid an advance of $10.0 million to write his book My Life. Suppose the book took three years to write. In the time he spent writing. Clinton could have been paid to make speeches. Given his popularity, assume that he could earn $8.4 million a year (paid at the end of the year) speaking instead of writing. Assume his cost of capital is 9.8% per year. a. What is the NPV of agreeing to write the book (ignoring any royalty payments)? b. Assume that, once the book is finished, it is expected to generate royalties of $5.3 million in the first year (paid at the end of the year) and these royalties are expected to decrease at a rate of 30% per year in perpetuity. What is the NPV of the book with the royalty payments?
Bill Clinton reportedly was paid an advance of $10.0 million to write his book My Life. Suppose the book took three years to write. In the time he spent writing, Clinton could have been paid to make speeches. Given his popularity, assume that he could earn $7.6 million a year (paid at the end of the year) speaking instead of writing. Assume his cost of capital is 9.4% per year. a. What is the NPV of agreeing to write the book (ignoring any royalty payments)? b. Assume that, once the book is finished, it is expected to generate royalties of $4.8 million in the first year (paid at the end of the year) and these royalties are expected to decrease at a rate of 30% per year in perpetuity. What is the NPV of the book with the royalty payments? a. What is the NPV agreeing to write the book (ignoring any royalty payments)? The NPV of agreeing to write the book is $ million. (Round to three decimal places.) b. Assume that, once the book is finished, it is expected to generate royalties of $4.8…
The Browning family of Colorado wants to buy a $102,000 house. (a) If they can get a loan of 80% of the value of the house, what is the amount of the loan?$ (b) What will be the down payment on this loan?$ (c) If they decide to obtain an FHA loan, what will be the minimum cash investment? (Do not forget that the maximum FHA loan for this location has to be determined using the FHA Maximum Loan Values by State table.)$
John has a great idea to setup a pie and pastie factory. He needs $200,000 to buy theequipment and to lease suitable premises for a year. He is not sure whether he should setup acompany and issue 200,000 shares to his friends, or else try to borrow $200,000 from a bank toraise those funds.Explain to him the advantages and disadvantages of both alternatives.
Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $1,650,000 and will last 10 years. Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $230,000. She estimates that the return from owning her own shop will be $55,000 per year. She estimates that the shop will have a useful life of 6 years. Barker Company calculated the NPV of a project and found it to be $63,900. The project's life was estimated to be 8 years. The required rate of return used for the NPV calculation was 10%. The project was expected to produce annual after-tax cash flows of $135,000. Required: 1. Compute the NPV for Campbell Manufacturing, assuming a discount rate of 12%. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a…