4. You need to raise $1,000,000 to buy a dam that will provide energy to your town. Your taxrate is 40%. You would like to finance the transaction by issuing 20-year bonds at a 8%coupon rate, payable annually.(a) What is your before-tax and after-tax cost of money" (taking into account that thecoupon payments on the bonds are tax-deductible, but not the repayment of principal in year20), if the bonds sell for face value? Briefly discuss your results. Solution: before-tax: 8%.after-tax: 4.8% per year.(b) Would this financing option be good enough to consider if your minimum acceptablerate of return was 10%?(c) Would this financing option be good enough to consider if your minimum acceptablerate of return was 4%?(d) What's the price of the bond at a MARR = 10% per year? Use a before-tax analysis andsolve manually (ie., using factor notation). Solution: $829.728.7

(A) Before-Tax and After-Tax cost of money:Before-tax cost of money: 8%(coupon rate)Tax-rate:…

Answered: 4. You need to raise $1,000,000 to buy…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Suppose you are a manager for a certain company. You earn $50,000 per year and are in the 28% federal income tax bracket. Each year you contribute $5,500 tax free to your individual retirement account, IRA. The account earns 7% annual interest. In addition, the amount of tax that you save each year by making these "pre-tax" contributions is invested in a taxable aggressive growth mutual fund averaging 16%. a)How much tax do you save (in $) each year by making the retirement fund contributions? b)Using Table 12-1, much will the retirement fund be worth (in $) in 30 years? (Round your answer to the nearest cent.) c) Although the income from this investment is taxable each year, using Table 12-1, how much will the "tax savings" fund be worth (in $) in 30 years? (Round your answer to the nearest cent.)
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Am. 101.

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