5.1 Frasier needs £250,000 to set up his business. Bank A is willing to lend him the money under the following conditions: the loan is to be repaid in equal instalments at the end of each of the next five years and the interest rate is 15%. How much of the third payment applies to the principal balance?
5.1 Frasier needs £250,000 to set up his business. Bank A is willing to lend him the money under the following conditions: the loan is to be repaid in equal instalments at the end of each of the next five years and the interest rate is 15%. How much of the third payment applies to the principal balance?
Chapter4: Time Value Of Money
Section: Chapter Questions
Problem 28P
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Transcribed Image Text:5.1 Frasier needs £250,000 to set up his business.
Bank A is willing to lend him the money under the
following conditions: the loan is to be repaid in
equal instalments at the end of each of the next five
years and the interest rate is 15%. How much of the
third payment applies to the principal balance?
5.2 To ensure she has the necessary capital in 5
years' time to set up her own business, Jane plans to
deposit £9,000 per annum for 5 years, beginning on
January 1st 2022. Jane's savings account pays 8%
p.a. compounded annually. However, at the end of
the third year of her five-year planning horizon, Jane
withdraws £4,000 to purchase a car. And at the end
of the fourth year, she withdrew £5,000 to fund a
holiday in New Zealand. Relative to the amount Jane
had originally planned on savings, what was the
shortfall in her savings at the end of the fifth year?
5.3 Travis & Sons has a capital structure that is based
on 35 percent debt, 5 percent preferred stock, and
60 percent common stock. The pretax cost of debt is
7.8 percent and the cost of preferred stock is 9.4
percent. The firm's common stock has a beta of 2.3
and the market risk premium is 5.83%. The tax rate is
21 percent and Treasury Bills offer a 3% return. A
project is being considered that is equally as risky as
the overall company. This project has initial costs of
£250,000 and annual cash inflows of £101,000,
£201,000, and £160,000 over the next three years,
respectively. Based on the NPV approach, should
this project be accepted? Why / why not?
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