Chapter 15 Problems 1

1. Venture capital required rate of return. Blue Angel Investors has a success ratio of 10% with its venture funding. Blue Angel requires a rate of return of 20% for its portfolio of lending, and the average length on its loan is five years. If you were to apply to Blue Angel for a $100,000 loan, what is the annual percentage rate you would have to pay for this loan?

Chapter 15 Problems 3

3. Straight bank loan. Left Bank has a standing rate of 8% (APR) for all bank loans and requires monthly payments. What is the monthly payment if a loan is for (a) $100,000 for five years, (b) $250,000 for ten years, or (c) $1,000,000 for twenty-five years? What is the effective annual rate of each of these loans?

Chapter 15 Problems 5

5. Discount loan. Up-Front Bank uses discount loans for all its customers who want one-year loans. Currently, the bank is providing one-year discount loans at 8%. What is the effective annual rate on these loans? If you were required to repay $250,000 at the end of the loan for one year, how much would the bank give you on your loan at the start of the loan?

Chapter 16 Problems 1

1. Different loan rates. Winthrop Enterprises is a holding company (a firm that owns all or most of some other companies’ outstanding stock). Winthrop has four subsidiaries. Each subsidiary borrows capital from the parent company for projects. Ervin Company is successful with its projects 85% of the time, Morten Company 92%% of the time, Richmond Company 78% of the time, and Garfield Company 83% of the time. What loan rates should Winthrop Enterprises charge each subsidiary for loans?

Chapter 16 Problems 5

5. Break –even EBIT (with and without taxes). Alpha Company is looking at two different capital structures, one an all-equity firm and the other a leveraged firm with $2 million of debt financing at 8% interest. The all-equity firm will have a value of $4 million and 400,000 shares outstanding. The leveraged firm will have 200,000 shares outstanding.

a. Find the break-even EBIT for Alpha Company using EPS if there are no corporate taxes.

b. Find the break-even EBIT for Alpha Company using EPS if the corporate tax rate is 30%.

c. What do you notice about these two break-even EBITs for Alpha Company?

1. Venture capital required rate of return. Blue Angel Investors has a success ratio of 10% with its venture funding. Blue Angel requires a rate of return of 20% for its portfolio of lending, and the average length on its loan is five years. If you were to apply to Blue Angel for a $100,000 loan, what is the annual percentage rate you would have to pay for this loan?

Chapter 15 Problems 3

3. Straight bank loan. Left Bank has a standing rate of 8% (APR) for all bank loans and requires monthly payments. What is the monthly payment if a loan is for (a) $100,000 for five years, (b) $250,000 for ten years, or (c) $1,000,000 for twenty-five years? What is the effective annual rate of each of these loans?

Chapter 15 Problems 5

5. Discount loan. Up-Front Bank uses discount loans for all its customers who want one-year loans. Currently, the bank is providing one-year discount loans at 8%. What is the effective annual rate on these loans? If you were required to repay $250,000 at the end of the loan for one year, how much would the bank give you on your loan at the start of the loan?

Chapter 16 Problems 1

1. Different loan rates. Winthrop Enterprises is a holding company (a firm that owns all or most of some other companies’ outstanding stock). Winthrop has four subsidiaries. Each subsidiary borrows capital from the parent company for projects. Ervin Company is successful with its projects 85% of the time, Morten Company 92%% of the time, Richmond Company 78% of the time, and Garfield Company 83% of the time. What loan rates should Winthrop Enterprises charge each subsidiary for loans?

Chapter 16 Problems 5

5. Break –even EBIT (with and without taxes). Alpha Company is looking at two different capital structures, one an all-equity firm and the other a leveraged firm with $2 million of debt financing at 8% interest. The all-equity firm will have a value of $4 million and 400,000 shares outstanding. The leveraged firm will have 200,000 shares outstanding.

a. Find the break-even EBIT for Alpha Company using EPS if there are no corporate taxes.

b. Find the break-even EBIT for Alpha Company using EPS if the corporate tax rate is 30%.

c. What do you notice about these two break-even EBITs for Alpha Company?

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