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1. Harvest Company, Inc., has a 5% cost of debt and an 8% cost of equity. The firms D/A ratio is 0.6. The firms tax rate is 20%.

a. What is the weighted average cost of capital?

b. What D/A would create a weighted average cost of capital of 7%?

2. Green and Gold Farms has two investment alternatives. The correlation coefficient between the two investments is 0.3. The investment alternatives are:

	Farm Expansion Opportunity	Main St Business
Expected rate-of- return	0.08	0.11
Standard deviation	0.04	0.10

a. Find the expected value, the standard deviation and variance of the portfolio if Green and Gold Farms invests 70% in the Main St Business investment and 30% in the Farm Expansion Opportunity investment.

b. Find the expected value, standard deviation and variance of the portfolio if Green and Gold Farms invests 30% in the Main St Business investment and 70% in the Farm Expansion Opportunity investment.

c. How do the answers in part (a) and (b) compare? Why are they different?

3. You are selling used machinery for $10,000. The buyer can pay $3,000 now, $2,500 next year, $2,500 in two years, and $3,000 in three years. You require an 8% interest rate.

a. Would you accept the offer?

b. If the borrower wanted to instead make $1,000 payments now, next year, and in two years, how large would their balloon payment in year three need to be for you to accept the offer?

4. You just struck oil in the middle of your hay field. An oil company has offered to pay you a perpetual (never-ending) annuity of $15,000 per year for the rights.

a. What is the value of the offer, assuming a 6% discount rate?

b. You would prefer to receive your payments faster and propose a 10-year series of payments. How large would each of the equal payments be to equal the present value of the offer in part (a)? (Once again, assume a 6% discount rate.)

c. The oil company counters with an offer of $30,000 per year for the next ten years plus a $1,000 perpetual (never-ending) annuity thereafter. What is the present value of that offer? (Once again, assume a 6% discount rate.)

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