1. Suppose you have a $10,000 loan. The compound interest on the loan is 8%. You have a single payment due in 10 years. What is the total interest payment on this loan?

2. Suppose you are considering selling a bond to finance the construction of a new building. The bond's face value is $3,000,000. Interest is compounded annually ay 4%. The bond makes coupon payments of $1,000 annually, and the duration of the bond is 10 years. What is the price of the bond?

3. Suppose that Seattle Health Plans currently uses zero-debt financing. Its operating profit is $1 million, and it pays taxes at a 40 percent rate. It has $5 million in assets and, because it is all-equity financed, $5 million in equity. Suppose the firm is considering replacing half of its equity financing with debt financing that bears an interest rate of 15 percent. What is the total dollar return to investors, and what is the ROE to stockholders under both scenarios? Is the decision to replace half of its equity financing with debt financing a good decision?

4. Suppose that Morningside Nursing Home, a not-for-profit corporation, is estimating its corporate cost of capital. Its tax-exempt debt currently requires an interest rate of 6.2 percent, and its target capital structure calls for 60 percent debt financing and 40 percent equity financing. Its estimated cost of equity is 15.4 percent. What is Morningside's corporate cost of capital?

Answer rating: 100% (QA)

1 To calculate the total interest payment on the loan we can use the compound interest formula Total interest payment Principal 1 interest raten Princ... View the full answer