Value and Annuity Payments Christy and Michael are trying to decide if they
will have enough money to retire early in 15 years, at age 60. Their current
assets are $250,000 in retirement plans and they have $90,000 in other
investments. Together, they contribute $30,000 per year to their retirement
plans and another $6,000 to other investments.
a. If their
assets grow at 9 percent per year, how much money will they have when they turn
they retire, they will invest their wealth more conservatively and it will earn
6 percent per year. What will be the amount of their annual payments if they
expect to live for 30 years in retirement?
2. Cost of Capital (WACC). Suppose your company has decided
to use a divisional WACC approach to analyze projects. The firm currently has 2
divisions, A and B, with betas for each division of 0.5 and 1.5, respectively.
If all current and future projects will be financed with half debt and half
equity, and if the current cost of equity (based on an average firm beta of 1.0
and a current risk-free rate of 5%) is 16% and the after-tax yield on the
company’s bonds is 6%, what are the WACCs for divisions A and B? Hint: First
Solve for Market Risk Premium (MRP). MRP = (Km-Rf)