Question

1. Categorize these transactions into Capital Budgeting, Capital Structure, and Working Capital Management decisions by putting (CB), (CS), or (WCM) by each item: (10 points)
2. 1. A company purchasing a new fleet of corporate vehicles.
   2. A company divesting (spinning off) a business line
   3. A company repurchasing its own stock back from stockholders
   4. A company paying off its bondholders early
   5. A company demanding early payment on its accounts receivable

1A) How much should I sell my car for in 5 years if I buy it for $40,000 and want to lose no more than 10% per year in depreciation?

1B)What must the EAR be on a 10-year annuity that makes $100 quarterly payments and costs $10,000 today?

Answer 1

a) Purchasing a new fleet of corporate vehicles is CB. Company is basically expanding business by buying new fleet.

b) company divesting is CS. Company is basically spinning off it's division(let's say).

c) company repurchasing it's own stock is CS. Company is buying back share from open market and thus lead to reduction in issued capital.

d) company paying off its bond holders early is CS. Company has raised money by issuing bond which is an eg. of debt fund raising. By paying off the bondholders company os reducing it's liabilities and thus debt financing and results in restructuring.

e) demading early payment on accounts receivable is WCM. Company has made credit sales for which it is demanding money from debtors which ia part of working capital management.Account receivables is part of working capital.

1A) Car Brought for $40000. You dont want to loose not more than 10% per year in depreciation.Therefore, selling price would be Purchase price - 10% depreciation(calculated considering reducing balance method)

So, Sale price would be $23620.

Year	Opening value	depreciation @10%	closing value (op value - dep)
1	40000	4000	36000
2	36000	3600	32400
3	32400	3240	29160
4	29160	2916	26244
5	26244	2624.4	23619.6

1B) Quartery Payment is done

N = 10*4 = 40 years

PMT = $100

PV = $10000

r = ? ( ans need to be divided by 4 to calculate quarter rates)

Incorporating all these values in TVM Formulla on calculator, will get r= 38.91%

r = 38.91%/4 = 9.73%

EAR = (1+i/n)ⁿ-1

= (1+0.0973/40)⁴⁰-1

=(1.0024325)⁴⁰-1

=1.1021-1

= 10.21%