4. You need to raise $1,000,000 to buy a dam that will provide energy to your town. Your tax rate is 40%. You would like to finance the transaction by issuing 20-year bonds at a 8% coupon rate, payable annually. (a) What is your before-tax and after-tax cost of money" (taking into account that the coupon payments on the bonds are tax-deductible, but not the repayment of principal in year 20), if the bonds sell for face value? Briefly discuss your results. Solution: before-tax: 8%. after-tax: 4.8% per year. (b) Would this financing option be good enough to consider if your minimum acceptable rate of return was 10%? (c) Would this financing option be good enough to consider if your minimum acceptable rate of return was 4%? (d) What's the price of the bond at a MARR = 10% per year? Use a before-tax analysis and solve manually (ie., using factor notation). Solution: $829.728.7
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- You have $10,000 cash that you want to invest. Normally, you would deposit the money in a savings account that pays an annual interest rate of 6%. However, you are now considering the possibility of investing in a bond. Your alternatives are either a nontaxable municipal bond paying 9% or a taxable corporate bond paying 12%. Your marginal tax rate is 30% for both ordinary income and capital gains. (The marginal tax rate of 30% means that you will keep only 70% of your bond interest income.) You expect the general inflation rate to be 3% during the investment period. You can buy a high-grade municipal bond costing $10,000 that pays interest of 9% ($900) per year. This interest is not taxable. A comparable high-grade corporate bond for the same price is also available. This bond is just as safe as the municipal bond but pays an interest rate of 12% ($1,200) per year. The interest for this bond is taxable as ordinary income. Both bonds mature at the end of year 5.(a) Determine the real…1) If you were to save and invest $1,000 a month in after-tax dollars and earn 6% before taxes annually, how much would you have at the end of 10 years, 20 years and 40 Years? Assume you had an effective tax rate on your investments of 30%. 2) If you were to invest $1,000 a month in pre-tax dollars in a 401K plan and earn 6% before taxes annually, how much pre-tax money would you at the end of 10 years, 20 years and 40 Years? 3) Assuming you had saved $2.0 million in your 401K pre-tax, how many years would it last if you withdrew 100K per year and you continued to earn 4%before taxes annually on any balances prior to withdrawal? How much would you owe in taxes if your retirement tax rate was 25%? How much would you have to meet expenses?a) You want to receive $ 15 million in 30 years for a major purchase. If a financial institution offers 2. 125 % per year, how much should you invest (one time) today to make this happen? b) You want to buy a house that currently costs $ 350,000. The bank requires 22% down and 12-year mortgage rates are around 4.02%. Ignoring other costs and expenses associated with the house, what would your quarterly payments be? Ignore tax and insurance payments. How long wil it take you to multiply your money five hundred-fold if a bank offered you 5. 00% per year? Assume quarterly payments.
- Your firm needs to borrow $1.0 million for one year. The firm has no other short term borrowings and it's combined state and federal tax rate is 25%. Your banker offers several lending alternatives. Which one will you choose? Select one: A)6.50% simple interest with a 20.00% compensating balance b) . 8.25% simple interest c) . 7.00% simple interest with a 15.00% compensating balance d) . 8.25% discount interestAssume that you just won the state lottery. Your prize can be taken either in the form of 100,000 at the end of each of the next 15 years or as a single amount of $1,000,000 paid immediately. If you expect to be able to earn 5% annually on your investments, ignoring taxes and other considerations, which alternative should you take? Why?Answer each of the following independent questions. Ignore personal income taxes. Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) Required: 1. Suppose you invest $4,100 in an account bearing interest at the rate of 10 percent per year. What will be the future value of your investment in five years? 2. Your best friend won the state lottery and has offered to give you $11,600 in four years, after he has made his first million dollars. You figure that if you had the money today, you could invest it at 8 percent annual interest. What is the present value of your friend’s future gift? 3. In four years, you would like to buy a small cabin in the mountains. You estimate that the property will cost you $68,500 when you are ready to buy. How much money would you need to invest each year in an account bearing interest at the rate of 4 percent per year in order to accumulate the $68,500 purchase price? 4. You have estimated that your educational expenses…
- You have $10,000 cash, which you want to invest. Normally, you would deposit the money in a savings account that pays an annual interest rate of 6%. However, you are now considering the possibility of investing in a bond. Your marginal tax rate is 30% for both ordinary income and capital gains. You expect the general inflation rate to be 3% during the investment period. You can buy a high-grade municipal bond costing $10,000 that pays interest of 9% ($900) per year. This interest is not taxable. A comparable high-grade corporate bond is also available that is just as safe as the municipal bond but pays an interest rate of 12% ($1,200) per year. This interest is taxable as ordinary income. Both bonds mature at the end of year 5.(a) Determine the real (inflation-free) rate of return for each bond.(b) Without knowing your MARR, can you make a choice between these two bonds?In order to have $85,000 four years from now for equipment replacement, a construction company plans to set aside money today in government-issues bonds. If the bonds earn interest at a rate of 6% per year, how much money must the company invest?3. You have just taken a job that requires you to move to a new city. In relocating, you face the decision of whether to buy or rent a house. A suitable house costs $300,000 and you have saved enough for the down payment. The (nominal) mortgage interest rate is 10% per year, and you can also earn 10% per year on sav- ings. Mortgage interest payments are tax deductible, interest earnings on savings are taxable, and you are in a 30% tax bracket. Interest is paid or received, and taxes are paid, on the last day of the year. The expect- ed inflation rate is 5% per year. The cost of maintaining the house (replacing worn- out roofing, painting, and so on) is 6% of the value of the house. Assume that these expenses also are paid entirely on the last day of the year. If the maintenance is done, the house retains its full real value. There are no other rele- vant costs or expenses. a. What is the expected after-tax real interest rate on the home mortgage? b. What is the user cost of the house?…
- Vince Oliver plans to invest P30,000 in municipal bonds, savings bonds,and treasury bills. He wishes to invest a minimum of P 5,000 in each of the three. If the interest rates are 12% for municipal bonds, 8% for savings bonds, and 10% for treasury bills, how much should he invest in each? Note: Do not use excel to solve the problemWhat is the payback if the investment is $22,000 and the after tax benefits are: Years 1 & 2 = $2,500 per year Years 3 & 4 = $3,500 per year Years 5 & 6 =$4,000 per year Years 7 & 8 = $4,500 per year Year 9 = $3,000 Year 10 = $1,500ou just won the NY State Lottery. The Grand Prize is $275 million. Lottery officials give you a choice to receive the $275 million today, or you can receive $15 million per year for the next 25 years. What should you do, assuming interest will be stable at 2.5% per year for the entire period? Note: Ignore taxes and the utility of satisfying or delaying consumption. take the $275 million today since the upfront payment is less than the value of the annunity take the annuity of receiving $15m per year for 25 years since the upfront payment is less than the value of the annunity take the $275 million today since the upfront payment is greater than the value of the annunity take the annuity of receiving $15m per year for 25 years since the upfront payment is greater than the value of the annunity