ENGINEERING ECONOMY DIGITAL ACCESS
ENGINEERING ECONOMY DIGITAL ACCESS
8th Edition
ISBN: 9781259676819
Author: Blank
Publisher: MCG
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Chapter 1, Problem 46P
To determine

Calculate debt-equity mix.

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In 2011, El Paso Water Utilities (EPWU) issued bonds worth $9.125 million to improve the Van Buren dam in central El Paso and to finance three other drainage projects. The bonds were purchased by the Texas Water Development Board under the federal stimulus program wherein EPWU did not have to pay any dividend on the bonds. If the bond dividend rate would have been 4% per year, pay able quarterly, with a bond maturity date 18 years after issuance, what is the present worth of the dividend savings to EPWU rate payers? Assume the market interest rate is 6% per year.
Why do most of the engineers and financial managers prefer rate-of-return analysis to the PW method?
Two friends each invested $20,000 of their own (equity) funds. Stan, being more conservative, purchased utility and manufacturing corporation stocks. Theresa, being a risk taker, leveraged the $20,000 and purchased a $100,000 condo for rental property. Considering no taxes, dividends, or revenues, analyze these two purchases by doing the following for 1 year after the funds were invested. (a) Determine the year-end values of their equity funds if there was a 10% increase in the value of the stocks and the condo. (b) Determine the year-end values of their equity funds if there was a 10% decrease in the value of the stocks and the condo. (c) Use your results to explain why leverage can be financially risky.
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