# Future value of an ordinary annuity

Future value of an ordinary annuity Student Help Problem 6-1:  (Future value of an ordinary annuity).  What is the future value of each of the following streams of payments?

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1.      \$500 a year for 10 years compounded annually at 5 percent

2.      \$100 a year for 5 years compounded annually at 10 percent

3.      \$35 a year for 7 years compounded annually at 7 percent

4.      \$25 a year for 3 years compounded annually at 2 percent

Problem 13-4:  (Forecasting revenues using scenario analysis)Floating Homes, Inc. is a manufacturer of luxury pontoon and house boats that sell for \$40,000 to \$100,000. To estimate its revenues for the following year, Floating Homes divides its boat sales into three categories based on selling price (high, medium, and low) and estimates the number of units it expects to sell under three different economic scenarios. These scenarios include a recession (Scenario I), a continuation of current conditions in which the economy is level (Scenario II), and a strong economy (Scenario III). These estimates are given below:

Scenario I (Recession)

Scenario II (Level Economy)

Scenario III (Strong Economy)

Probability

25%

50%

25%

High-Priced Boats Category

Unit sales

50

400

1,000

Average price per unit

\$90,000

\$90,000

\$90,000

Medium-Priced Boats Category

Unit sales

100

800

3,000

Average price per unit

\$70,000

\$70,000

\$70,000

Low-Priced Boats Category

Unit sales

200

1,500

5,000

Average price per unit

\$50,000

\$50,000

\$50,000

Using these estimates, calculate the expected revenue for Floating Homes, Inc. for the following year.

Problem 14-1:  (Defining capital structure weights)Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for \$400 million. Since the primary asset of this business is real estate, Templeton’s management has determined that they will be able to borrow the majority of the money needed to buy the business. The current owners have no debt financing but Templeton plans to borrow \$300 million and invest only \$100 million in equity in the acquisition. What weights should Templeton use in computing the WACC for this acquisition?

The appropriate wd weight is __ %. (Round to one decimal place)

Problem 14-3:  (Individual or component costs of capital) Compute the cost of capital for the firm for the following:  Compute each in % (Round to two decimal places)..

1.      A bond that has a \$1,000 par value (face value) and a contract or coupon interest rate of 11%. The bonds have a current market value of \$1,125 and will mature in 10 years. The firm’s marginal tax rate is 34%.

2.      A new common stock issue that paid a \$1.80 dividend last year. The firm’s dividends are expected to continue to grow at 7% per year forever. The price of the firm’s common stock is now \$27.50.

3.      A preferred stock that sells for \$125, pays a 9% dividend and has a \$100 par value that is selling at par.

4.      A bond selling to yield 12% where the firm’s tax rate is 34%.

Problem 14-4:  (Individual or component costs of capital) Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the firm for the following:  Compute each in % (Round to two decimal places)

1.     A bond that has a \$1,000 par value (face value) and a contract or coupon interest rate of 12%. The bond is currently selling for a price of \$1,125 and will mature in 10 years. The firm’s tax rate is 34%.

2.     If the firm’s bonds are not frequently traded, how would you go about determining a cost of debt for this company?

3.     A new common stock issue that paid a \$1.75 dividend last year. The par value of the stock is \$15, and the firm’s dividends per share have grown at a rate of 8% per year. This growth rate is expected to continue into the foreseeable future. The price of this stock is now \$28.

4.     A preferred stock paying a 10% dividend on a \$125 par value. The preferred shares are currently selling for \$150.

A bond selling to yield 13% for the purchaser of the bond. The borrowing firm faces a tax rate of 34%.

Problem 12-1:  (Determining relevant cash flows)Captain’s Cereal is considering introducing a variation of its current breakfast cereal, Crunch Stuff. This new cereal will be similar to the old, with the exception that it will contain sugar-coated marshmallows shaped in the form of stars. The new cereal will be called Crunch Stuff n’ Stars. It is estimated that the sales for the new cereal will be \$25 million; however, 20% of those sales will draw from former Crunch Stuff customers who have switched to Crunch Stuff n’ Stars and who would not have switched if the new product had not been introduced. What is the relevant sales level to consider when deciding whether or not to introduce Crunch Stuff n’ Stars?

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