Required: 1. In transaction (a), determine the present value of the debt. Note: Round your intermediate calculations and final answer to nearest whole dollar. Present value
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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On January 1, Boston Company completed the following transactions (use a 7% annual interest rate for all transactions): (
FV of $1, PV of $1, FVA of $1, and PVA of $1)
Note: Use appropriate factor(s) from the tables provided.
a. Promised to pay a fixed amount of $7,500 at the end of each year for nine years and a one-time payment of
$118,000 at the end of the 9th year.
b. Established a plant remodeling fund of $492,250 to be available at the end of Year 10. A single sum that will grow to
$492,250 will be deposited on January 1 of this year.
c. Agreed to pay a severance package to a discharged employee. The company will pay $76,500 at the end of the first
year, $114,000 at the end of the second year, and $151,500 at the end of the third year.
d. Purchased a $177,500 machine on January 1 of this year for $35,500 cash. A five-year note is signed for the balance.
The note will be paid in five equal year-end payments starting on December 31 of this year.
Required:
1. In transaction (a), determine the present value of the debt.
Note: Round your intermediate calculations and final answer to nearest whole dollar.
Present value](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fc79b9d32-37ad-4fcf-afa0-fa78fa223ab8%2F064823d2-854f-48ad-959b-46d41893ab54%2Fd7bp9ra_processed.png&w=3840&q=75)
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