Assume that there is corporate tax but no other frictions. Based on the propositions of Modigliani and Miller, which statement is least accurate:

a. The optimal structure is 100%

b. The cost of equity increases as the leverage ratio increases

c. The cost of debt increases as leverage ratio increases

d. The weighted cost of capital decreases as the leverage ratio increases

e. Firm value increases as the firm takes on more debt

Problem 27-01 Lease or Buy [LO3] You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $5,300,000, and it would be depreciated straight-line to zero over four years. Because of radiation contamination, it actually will be completely valueless in four years. You can lease it for $1,550,000 per year for four years. Assume that the tax rate is 23 percent. You can borrow at 7 percent before taxes. What is the NAL of the lease? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Should you lease or buy?

4) The effective annual interest rate is 6%. A 30 year loan is repaid as follows (payments starting at the end of the first year):

For the first 10 years, interest only.

For the second 10 years, each payment is twice the interest due in that period.

For the final 10 years, level payments of X per year.

Find the outstanding balance at the end of each 10 year period, and find X. (Optional: do it without using a spreadsheet.)

What is the role of the required return on equity investments in stock valuation models?

Why would a crisis in the subprime mortgage market lead to declining prices in the U.S. equity markets?

3) Tian buys a car that costs $35,000.

a) He pays $5,000 down (i.e. immediately), and he pays off the rest of the loan with 26 bi-weekly payments per year of $250 for 5 years. What is the effective annual interest rate i?

b) Instead, he pays no money down but increases his monthly payments to $290, except for the last one which is exactly enough to pay off the loan. The interest rate is the same as in part a). Is the last payment a balloon or a drop payment? How much is it?

2.   The following data are taken from the sheet at the end of the current year:

Cash                                                                         543,000

Short-term Investments                                   826,000

Notes Payable, long-term                                235,000

Prepaid Insurance                                                 70,000

Accounts Payable                                               902,000

Accrued Liabilities                                               526,000

Inventory                                                          1,625,000

Accounts Receivable                                          117,000

Salaries Payable                                                  165,000

Intangible Assets                                                 500,000

Property, Plant and Equipment                1,800,000             

                                                          Computation          Interpretation—what does the result mean?

Compute:     a. Working capital:    ___________________   __________________________________

b. Current ratio:       ___________________   __________________________________

         c. Quick ratio:           ___________________   __________________________________

Is more regulation needed in order to reduce financial scandals? Explain

Lancaster Lumber buys $8 million of materials (net of discounts) on terms 3/5, net 55, and it currently pays on the 5th day and takes discounts. Lancaster plans to expand, which will require additional financing. If Lancaster decides to forgo discounts, how much additional credit could it obtain, and what would be the nominal and effective cost of that credit? If the company could get the funds from a bank at a rate of 9%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? Should Lancaster use bank debt or additional trade credit? Explain.

You are planning to save for retirement over the next 30 years. To save for retirement, you will invest $1,700 per month in a stock account in real dollars and $595 per month in a bond account in real dollars. The effective annual return of the stock account is expected to be 12 percent, and the bond account will earn 8 percent. When you retire, you will combine your money into an account with an effective return of 9 percent. The returns are stated in nominal terms. The inflation rate over this period is expected to be 4 percent.

a. How much can you withdraw each month from your account in real terms assuming a 25-year withdrawal period?

b. What is the nominal dollar amount of your last withdrawal?

Use your calculator to determine​ (1) the current mortgage payment​ (2) the total interest​ paid, (3) the payment after the first adjustment and​ (4) the maximum payment for each of the following 138,200, ​30-year mortgages. Assume that the initial interest rate is 6.90 percent.

a. Annually​ adjustable, 1 percent per​ year, 5 percent lifetime cap. Assume also that rates increase at least 1 percent per year until they reach the lifetime cap and rates never again drop below the lifetime cap for the term of the mortgage.

b. Fixed for 3 years and then annually​ adjustable, 2 percent per​ year, 5 percent lifetime cap. Assume also that rates increase at least 2 percent per year until they reach the lifetime cap and rates never again drop below the lifetime cap for the term of the mortgage.

c. Fixed for 5 years then annually​ adjustable, 2 percent per​ year, 6 percent lifetime cap. Assume also that rates increase at least 2 percent per year until they reach the lifetime cap and rates never again drop below the lifetime cap for the term of the mortgage.

d. Fixed for 5 years and then adjustable every 5​ years, 3 percent per​ period, 6 percent lifetime cap. Assume also that rates increase at least 3 percent per year until they reach the lifetime cap and rates never again drop below the lifetime cap for the term of the mortgage.

a. The current mortgage payment is $ (Round to the nearest​ cent.)

The payment after the first adjustment is $ (Round to the nearest​ cent.)

The maximum payment is $ (Round to the nearest​ cent.)

The total interest paid for a 138,200, ​30-year mortgages $ (Round to the nearest​ cent.)

b.  The current mortgage payment is $ (Round to the nearest​ cent.)

The payment after the first adjustment is $ (Round to the nearest​ cent.)

The maximum payment is $1. (Round to the nearest​ cent.)

The total interest paid for a 138,200, ​30-year mortgages ​$. (Round to the nearest​ cent.)

c. The current mortgage payment is   $. (Round to the nearest​ cent.)

The payment after the first adjustment is $ (Round to the nearest​ cent.)

The maximum payment is $ (Round to the nearest​ cent.)

The total interest paid for a 138,200, ​30-year mortgages $ (Round to the nearest​ cent.)

d. The current mortgage payment is $ (Round to the nearest​ cent.)

The payment after the first adjustment is $ (Round to the nearest​ cent.)

The maximum payment is $ (Round to the nearest​ cent.)

The total interest paid for a 138,200, ​30-year mortgages ​$ (Round to the nearest​ cent.)

Harrimon Industries bonds have 5 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 8%.

a) What is the yield to maturity at a current market price of $792? Round your answer to two decimal places. %

b) What is the yield to maturity at a current market price of $1,068? Round your answer to two decimal places. %

c) Would you pay $792 for each bond if you thought that a "fair" market interest rate for such bonds was 13%-that is, if rd = 13%? (options listed below)

1) You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.

2)You would not buy the bond as long as the yield to maturity at this price is less than the coupon rate on the bond.

3) You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.

4)You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.

5) You would buy the bond as long as the yield to maturity at this price equals your required rate of return.

Calculate the Present Worth (PW), Future Worth (FW), and Equivalent Uniform Annual Series value of cash flows below at an interest rate of 8% compounded annually.

Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $30 million per year. Plane B has a life of 10 years, will cost $132 million and will produce net cash flows of $27 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares are expected to be zero, and the company's cost of capital is 11%.

1. By how much would the value of the company increase if it accepted the better project (plane)? Enter your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Do not round intermediate calculations. Round your answer to two decimal places.

   $   million

2. What is the equivalent annual annuity for each plane? Enter your answers in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Do not round intermediate calculations. Round your answers to two decimal places.

   Plane A: $   million

   Plane B: $   million