One business has a large amount of debt on which it pays an annual yield of 8%. A competitor has no debt, and any excess money goes into the bank and earns a yield of 1.5%. Éach of these businesses bids on a contract which pays $40,000 in one year and nine months. Indicate which company gives this contract a higher present value, and calculate the difference between these present values, rounding to the nearest dollar. [Hint: for both businesses the yield is treated as positive.]

One business has a large amount of debt on which it pays an annual yield of 8%. A competitor has no debt, and any excess money goes into the bank and earns a yield of 1.5%. Éach of these businesses bids on a contract which pays $40,000 in one year and nine months. Indicate which company gives this contract a higher present value, and calculate the difference between these present values, rounding to the nearest dollar. [Hint: for both businesses the yield is treated as positive.]

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter9: The Cost Of Capital

Section: Chapter Questions

Problem 16P

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