|
taxable
income more than
|
taxable
income less than
|
tax rate
|
|
0.00
|
$ 50,000.00
|
15%
|
|
$ 50,001.00
|
$ 75,000.00
|
25%
|
|
$ 75,001.00
|
$ 100,000.00
|
34%
|
1. The following table summarizes a portion of US federal corporate tax rates for the 2007 tax year. Explain whether corporate tax rates are progressive, regressive or flat. Use a very simple example from the table to make your position and explanation clear.
2. Recall that the security market line (SML) illustrates the relationship between systematic risk and expected returns. Perhaps the most famous and practical application of the SML is the capital asset pricing model (CAPM), as follows:
E(Ri) = Rf + [E(Rm)-Rf] x βi
a. Define each of the variables or terms in this equation.
b. Calculate the E(Ri), assuming the E(Rm) equals 12%, Rf equals 6% and βi equals 1.12
3. Assume that a project has a negative net present value (NPV) of $500 and an internal rate or return (IRR) of 10%. Is the discount rate used to calculate the NPV higher than, lower than, or equal to 10%? Compare and contrast these two techniques, using this example and focusing on the IRR when the NPV is positive, zero and negative.
4. In a typical loan amortization the principal component of a fixed payment increases and the interest component decreases with each payment. The following figure illustrates this relation for a hypothetical 30 -year mortgage. Assume that someone borrows $5000 at an interest rate of 9 percent per year for five years, and agrees to make interest and principal payments in the amount of $1285.46 at the end of each year. Prepare a loan amortization schedule for each of the five years, showing the beginning principal balance, the total payment of 1285.46, the interest component of the payment, the principal component of the payment and the ending principal balance. Filling the blank spaces in the following framework to complete.
|
Loan amortization schedule
|
|
|
|
|
|
|
For a Loan of $5,000 at 9% interest, over 5years
|
|
|
|
|
|
|
Year
|
Beg Bal
|
total Payment
|
Interest
Paid
|
Principal paid
|
Ending
Bal
|
|
1
|
5,000
|
1285.46
|
?
|
?
|
?
|
|
2
|
?
|
1285.46
|
?
|
?
|
?
|
|
3
|
?
|
1285.46
|
?
|
?
|
?
|
|
4
|
?
|
1285.46
|
?
|
?
|
?
|
|
5
|
?
|
1285.46
|
?
|
?
|
?
|
|
total
|
|
6427.3
|
?
|
5000
|
|
5. The weighted average cost of capital (WACC) can be related to the basic accounting equation, as follows: A = L +OE
Compare and contrast the WACC to this basic accounting equation. Does the WACC contain a profit component? How does the WACC relate to the discount rate used in t a net present value(NPV) computation, using a case where NPV equals zero to make your point?