Accounting

Question 1:   

1. Time Value of Money: Review the examples of Time Value of Money (TVM) problems in Chapter 5 of the text.  (Fundamentals of Financial Management, 13th Edition)

· Using your own industry as the context, create and solve four of your own original TVM problems: (1) lump-sum present value, (2) lump-sum future value, (3) present value of an annuity, and (4) future value of an annuity. Your scenarios may be fictitious, but they should make sense in the real-life context of your industry.

· Write a 1-paragraph summary for each of your scenarios that explains the “real-life” context of these four problems as well your interpretations of each of the calculations. (4 paragraphs total) 

Question 2:

1. Imagine you are the manager of operations for a manufacturing company. Your vice president wants to expand production by building a new facility, and she would like you to develop a business case for the project. Assume that your company’s weighted average cost of capital is 13%, the after-tax cost of debt is 7%, preferred stock is 10.5%, and common equity is 15%. As you work on the business case, you surmise that this is a fairly risky project because of a recent slowing in product sales. In fact, when using the 13% weighted average cost of capital, you discover that the project is estimated to return about 10%, which is quite a bit less than the company’s weighted average cost of capital. Your vice president suggests that the project could be financed from a mix of retained earnings (50%) and bonds (50%). She reasons that retained earnings do not cost the company anything because it is cash you already have and the after-tax cost of debt is only 7%. That would lower your weighted average cost of capital to 3.5% and make your 10% projected return look great.

Is your vice president’s suggestion to use a mix of 50% retained earnings and 50% bonds a good approach for this expansion? Explain why or why not. (1 paragraph)