Question

A large firm received a loan guarantee from the government. Due to the guarantee, the firm...

A large firm received a loan guarantee from the government. Due to the guarantee, the firm can borrow $50 million for five years at 8 percent interest rate per year instead of 10 percent per year. Calculate the value of the guarantee to the firm. (Ignore taxes.)

The correct answer is 3.79 million, but I do not understand how my professor got to that answer.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

The opportunity cost for firm (Discount rate ) = 10%

Also ,Annual saving due to difference in interest rates : 50 * (10-8 )% = 50*2% = 1

Present value of savings =PVA 10%,5*annual savings

                       = 3.7908*1

                       = $ 3.7908 million (rounded to 3.79 )

**find present value annuity factor from present value annuity table or using financial calculator :i=10%,n= 5 PMT =1 .

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Some multiple choice (polytomous item) tests correct for chance responses. Sally received a 44 out of...
Some multiple choice (polytomous item) tests correct for chance responses. Sally received a 44 out of 50 on her multiple choice midterm. There were four possible responses per question. Calculate Sally’s corrected score. 45 42 43 46 Please explain to me how you got the answer so I can understand it. Thank you!
1. What is the present value of $1000 to be received ten years from today, assuming...
1. What is the present value of $1000 to be received ten years from today, assuming an interest rate of nine percent per annum? Select one: a. $422. b. $470. c. $488. d. $402. 2. Cash inflows from wages tend to be the highest in which of the following? Select one: a. Early earning stage b. Retirement c. Prime earning stage d. First career stage 3. How long will it take Ivy's money to triple in value at 12 percent...
On January 1, year 1, Dave received 1,650 shares of restricted stock from his employer, RRK...
On January 1, year 1, Dave received 1,650 shares of restricted stock from his employer, RRK Corporation. On that date, the stock price was $25 per share. On receiving the restricted stock, Dave made the 83(b) election. Dave’s restricted shares will vest at the end of year 2. He intends to hold the shares until the end of year 4 when he intends to sell them to help fund the purchase of a new home. Dave predicts the share price...
A bank offers your firm a revolving credit arrangement for up to $50 million at an...
A bank offers your firm a revolving credit arrangement for up to $50 million at an interest rate of 1.25 percent per quarter. The bank also requires you to maintain a compensating balance of 3 percent against the unused portion of the credit line, to be deposited in a noninterest-bearing account. Assume you have a short-term investment account at the bank that pays .60 percent per quarter, and assume that the bank uses compound interest on its revolving credit loans....
On January 1, year 1, Dave received 2,150 shares of restricted stock from his employer, RRK...
On January 1, year 1, Dave received 2,150 shares of restricted stock from his employer, RRK Corporation. On that date, the stock price was $24 per share. On receiving the restricted stock, Dave made the 83(b) election. Dave’s restricted shares will vest at the end of year 2. He intends to hold the shares until the end of year 4, when he intends to sell them to help fund the purchase of a new home. Dave predicts the share price...
In the year prior to going public, a firm has revenues of $20 million and net...
In the year prior to going public, a firm has revenues of $20 million and net income after taxes of $2 million. The firm has no debt, and revenue is expected to grow at 20% annually for the next five years and 5% annually thereafter. Net profit margins are expected remain constant throughout. Capital expenditures are expected to grow in line with depreciation and working capital requirements are minimal. The average beta of a publicly traded company in this industry...
Consider a firm with a contract to sell an asset for $150,000 five years from now....
Consider a firm with a contract to sell an asset for $150,000 five years from now. The asset costs $75,000 to produce today. Given a relevant discount rate on this asset of 10 percent per year, will the firm make a profit on this asset? (3 points )At what rate does the firm just break even? (3 points) I have 150,000/1(1+.10) ^ 5 = 150,000 /1.10 ^ 5 = 150,000/ 1.61051 = 93138.20 - 75,000 = $18,138.20 profit. Is this...
You are considering making a loan at the bank. You will borrow $10,000 from the bank...
You are considering making a loan at the bank. You will borrow $10,000 from the bank today. The interest rate on the loan is 5 percent nominal compounded annually. You will completely pay off the loan with two equal payments. The first payment is due one year from today, and the second payment is due two years from today. Your loan payments will be $5378.05 each. How much will your loan balance be after you make the first payment? A....
Project Evaluation. Your firm is contemplating the purchase of a new $410,000 computer-based order entry system....
Project Evaluation. Your firm is contemplating the purchase of a new $410,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $30,000 at the end of that time. You will save $125,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $35,000 at the beginning of the project. Working capital will revert back to normal at the end of the...
Gemini, Inc., an all-equity firm, is considering an investment of $1.75 million that will be depreciated...
Gemini, Inc., an all-equity firm, is considering an investment of $1.75 million that will be depreciated according to the straight-line method over its four-year life. The project is expected to generate earnings before taxes and depreciation of $609,000 per year for four years. The investment will not change the risk level of the firm. The company can obtain a four-year, 9 percent loan to finance the project from a local bank. All principal will be repaid in one balloon payment...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT