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Question - With the possibility of the US Congress relaxing restrictions on cutting old growth timber, a local lumber company is considering an expansion of its facilities. The company believes it can sell lumber for $0.18/board foot. A board foot is a unit of measure for lumber. The tax rate for the company is 30 percent. The company has the following two opportunities:
• Build Factory A with annual fixed costs of $20 million and variable costs of $0.10/board foot.
• Build Factory B with annual fixed costs of $10 million and variable costs of $0.12/board foot.
Required:
a. What is the break-even point in board feet for Factory A and Factory B?
b. If the company wants to generate an after-tax profit of $2 million with Factory B, how many board feet would the company have to process and sell?
c. If demand for lumber is uncertain, which factory is riskier? Why?
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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Term Structure of Interest Rates
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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.
Simple Interest, Compound interest, discount rate, force of interest, AV, PV
CAPM and Venture Capital
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