- In our class discussion, we said that when you buy something, you buy ______________________________ in the context of ______________ and _____________.

- When deciding whether to issue debt or equity,
**discuss**the factors that would favor issuing debt.

**Explain**why a company would want to calculate its weighted average cost of capital.**Be sure to include**in your answer the topics of hurdle rate, optimal capital budget and optimal capital structure, as well as the marginal decision rule.- Suppose that you are considering the purchase of a
**20–year Treasury bond**, a

**20–year Tesla, Inc. corporate bond**, and the **common stock of Tesla**. The current risk premiums are provided:

- Maturity risk premium 00%
- Default risk premium 00%
- Real risk free rate 00%
- Seniority risk premium 50%
- Inflation premium 50%
- Liquidity premium 00%

Required:

** **

**Determine** the required rate of return for **all three securities** based on the information provided above.

- One year from today, investors anticipate that Riley Corporation’s common stock will pay a dividend of $4.00 per share. After that, investors believe that the dividend will grow at 30% per year for three years before settling down to a long-run growth rate of 8%. The required rate of return on Riley’s stock is 18%.
**What is the current stock price?**

- You are considering the purchase of the common stock of Herro Corporation.
**Given the following information, explain whether or not if you would buy the stock. Support your conclusions with computations.**The current market price of Herro is $100 per share. The one-year target estimated price is $122 per share. The dividend per share is $2.00. The beta for Herro is 1.60. The risk free rate is 2.0%. The market risk premium is 6.0%.

**Determine**the value of a share of preferred stock when the dividend rate is 8 percent and the par value is $75. The appropriate discount rate for a stock of this risk level is 10 percent.**Why is the price now different from the par value?**

- Ten years ago, Costco Wholesale Corporation (COST) issued 30-year bonds that had a coupon rate of 8 percent with the interest paid semi-annually. If these bonds are now trading with a 6 percent market required yield,
**at what price are these bonds now selling?**The par value of the bonds is $1,000.**Why is the price now different from the par value?** - Haslam Corporation considers its optimal structure to be 50 percent debt and 50 percent common stock. Haslam can borrow unlimited amounts at 9 percent. The common stock can be issued with a required return of 16%. Haslam has a tax rate of 25 percent.

Haslam is considering four investment proposals:

Expected Level of Investment

__Project __ __Return __ __Risk __ __Required__

A 15% High $ 20,000,000

B 8% Low $ 5,000,000

C 17% High $25,000,000

D 12% Average $ 10,000,000

When Haslam evaluates a project, they consider the level of risk. If the risk level is high, Haslam adds a premium of three percent to the WACC. If the risk level is low, Haslam subtracts one percent.

Required:

**Determine**Haslam’s weighted average cost of capital (WACC).**Determine**Haslam’s optimal capital budget.

- The Butlers are planning for their daughter’s education. She is two years old and will start college in 16 years.
**How much will they have to set aside each year**, beginning one year from today to have $500,000 when she starts college, if the interest rate is 7 percent?**How much will the**daughter**be able to withdraw**from the account each of her four years in college?

- On October 1
^{st}, Rogers bought a house for $350,000. He paid $50,000 in cash at the time of the purchase and agreed to pay the balance in four equal annual installments that include both the principal and 8 percent interest on the declining balance.

Required:

**Determine**the amount of the annual payment.**Determine**the total dollars of interest that Rogers will pay for this loan.**Determine**the amount of interest that is included in the first payment. It is not necessary to complete an amortization schedule.