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Exam #3
Name
Institutional Affiliation
2
TCA 420
Fall 2020
Exam #3
Chapters 8 -10
This exam is to be completed on an individual basis. Make sure to answer the questions
using a separate Word file. Please provide your name and section number.Send the
file to me at my regular email: Michael.dalbor@unlv.edu.
1. (10 points). Chapter 8 of the textbook discusses KDBT and KD. What is the difference
between them? Please do not just copy from the textbook.
When you borrow some money from any lender then the interest you’re paying back is
your cost of debt (KD). It could be any short-term loan, long term loan, cash credit,
overdraft or bonds. While any bond or other fixed income securities pay interest starting
from issuing of the securities till its maturities. The interest could be simple cumulative,
fixed or reliable. Yield to maturity is the total interest paid by the security from inception
till maturity divided by the number of years.
Cost of debt (KD) is the required rate of return on debt capital of a company. Yield to
maturity equals to the internal rate of return of debt.
2. (10 points). You are given the following information:
WD
40%
WE
60%
KDBT
10%
Tax Rate
40%
KE
14%
KD
???
Calculate the weighted average cost of capital (WACC).
Weighted average cost of capital = E/V × Re + D/V × Rd × (1-Tc)
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60/100/10 × 14/100 × 40/100/10 × (1- 40/100)
6/100 × 14/100 × 4/100 × (1-0.4)
= 2.016 × 10^-4
3. (10 points). We purchase a piece of new equipment with the following associated
costs:
Purchase Price
$50,000
Installation Costs
$10,000
Extended Warranty
$5,000
Sales Tax
$4,000
New working capital needed
$2,000
Salvage value of old equipment
$3,000
Calculate the net investment value (NINV) of the new equipment.
yourcalculations.
Capital expenditure – Depreciation expenses
Net investment value = gross capital expenditure – depreciation expenses
= $ 50,000 – purchase price
$ 10,000 – installation cost
$ 4000 – sales tax
$ 2000 – new working capital needed
$ 5000 – extended warranty
= [(50,000 + 10000 + 4000 + 2000 + 50...