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Problem - Kenn Day, manager of Day Laboratory, is investigating the possibility of acquiring some new test equipment. The equipment requires an initial outlay of $300,000. To raise the capital, Kenn will sell stock valued at $200,000 (the stock pays dividends of $24,000 per year) and borrow $100,000. The loan for $100,000 would carry an interest rate of 6%. Kenn figures that his weighted average cost of capital is 10% [(2/3 × 0.12) + (1/3 × 0.06)]. This weighted cost of capital is the discount rate that will be used for capital investment decisions. Kenn estimates that the new test equipment will produce a cash inflow of $50,000 per year. Kenn expects the equipment to last for 20 years.
Required -
1. Compute the payback period.
2. Assuming that depreciation is $14,000 per year, compute the ARR (on total investment).
3. Compute the NPV of the test equipment.
Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest. How much control does the Fed have over this longer real rate?
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Your Corp, Inc. has a corporate tax rate of 35%. Please calculate their after tax cost of debt expressed as a percentage. Your Corp, Inc. has several outstanding bond issues all of which require semiannual interest payments.
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