Part A: Answer each of the following questions in one to three
sentences, and perform calculations as requested.
1. The
following table summarizes a portion of U.S. federal corporate tax rates for
the 2007 tax year. Explain whether corporate tax rates are progressive,
regressive, of flat. Use a very simple example from the table to make your
position and explanation clear.
Taxable Income More than
|
Taxable Income Less than
|
Tax Rate
|
$0
|
$50,000
|
15%
|
$50,001
|
$75,000
|
25%
|
$75,001
|
$100,000
|
34%
|
1. Recall
that the net present value (NPV) and internal rate or return (IRR) techniques
take the time value of money into consideration. Compare and contrast these two
techniques, focusing on IRR when the NPV is positive, zero and negative. Be
sure to include a discussion of NPV discount rate in your response.
2. Recall
that the security market line (SML) illustrates the relationship between
systematic risk and expected returns. Perhaps the most famous and practical
application of the SML is the capital asset pricing model (CAPM), as follows:
E(R1) = RF + [E(RM) – RF] X βi
1. Define
each of the variables or terms in this equation.
2. Calculate
the E(Ri), assuming that E(RM) equals 12% Rf equals 6%
and βi equals
1.2.
1. Describe
the differences between an ordinary annuity, an annuity due, and perpetuity.
2. Assume
that a project has a negative net present value (NPV) of $500 and an internal
rate or return (IRR) of 10%. Is the discount rate used to calculate the NPV
higher than, lower than, or equal to 10%? Compare and contrast these two
techniques, using this example, and focusing on IRR when the NPV is positive,
zero and negative.
Part B: Answer each of the following questions in a composition of
1-2 paragraphs, or perform calculations as requested. Each answer is worth 20
points.
1. Explain
the concept of venture capital. Include a definition of the term venture
capital, describe who will need to obtain venture capital financing, and
explain the type of return that’s required from a venture capital firm.
2. In a
typical loan amortization, the principal component of a fixed payment increases
and the interest component decreases with each payment. The following figure
illustrates this relation for a hypothetical 30-year mortgage.
Interest
Component
Of payment
Principal Component
Of payment
|
Assume that someone borrows $5,000 at an interest rate of 9
percent per year for five years, and agrees to make interest and principal
payments in the amount of $1,285.46 at the end of each year. Prepare a loan
amortization schedule for each of the five years, showing the beginning
principal balance, the total payment of $1,285.46, the interest component of
the payment, the principal component of the payment, and the ending principal
balance. Fill in the blank spaces in the following framework to complete your
answer:
LOAN AMORTIZATION SCHEDULE |
|||||
For a Loan of $5,000 at 9% interest, Over 5 years
|
|||||
Year
|
Beginning Balance
|
Total Payment
|
Interest Paid
|
Principal Paid
|
Ending Balance
|
1
|
$50,000
|
$1,285.46
|
?
|
?
|
?
|
2
|
?
|
$1,285.46
|
?
|
?
|
?
|
3
|
?
|
$1,285.46
|
?
|
?
|
?
|
4
|
?
|
$1,285.46
|
?
|
?
|
?
|
5
|
?
|
$1,285.46
|
?
|
?
|
?
|
6427.30
|
?
|
$50,000
|
?
|
||
1. The
weighted average cost of capital (WACC) can be related to the basic accounting
equation, as follows:
A = L +
OE
Compare and contrast the WACC to this basic accounting equation.
Does the WACC contain a profit component? How does the WACC relate to the
discount rate used in a net present value (NPV) computation, using a case where
NPV equals zero to make your point?
