3. McCormick & Company is considering establishing newproducts in a new factory in Largo, Maryland. Theproject isexpected to last for eight years. To determine the right financingoption, you need to determine the appropriate discount based on theweighted average cost of capital. The cost of equity is estimatedusing the capital asset pricing model. Cash flows are assumed to besteady, the nominal risk-free rate for the short-term US governmenttreasury bills is 1.5 percent, the 10-year government bonds rate is2.5 percent, and the inflation rate is 2.54 percent. What is thereal risk-free rate? Then, assume a beta of 1.2 and a market returnof 5 percent. What is the cost of equity?
4. McCormick& Company is considering purchasing a newfactory in Largo, Maryland. After you and your team have conductedan analysis of alternative investments and cost of capital,McCormick has decided that a risk premium of 13 percent isappropriate for the investment into a new factory. Adding the riskpremium to the current risk-free rate of 7 percent, what is theminimum acceptable rate of return?
1.Liz is retiring from the US Postal Service and will turn 70next year. After 39 years of service, her monthly pension is$7,500. She does not qualify for SocialSecurity. Liz has accumulated $700,000 in her thriftsavings plan. The government requires that she convertit to an annuity or move it to a IRA. All of the moneyis pretax and tax can be avoided if it is moved to theIRA. The annuity will be calculated based on her lifeexpectancy of 17.5 years after age 70. The current USTreasurylong-term bond rate is 3 percent. How much will she get as anannuity monthly payment? Should Liz take the annuity ormove the money to the IRA? The tax regulations require that shetake out 4 percent of the amount each year.
2. Kathy plans to move to Maryland and take a job at McCormickas the assistant director of HR. She and her husband, Stan, plan tobuy a house in Garrison, MD, and their budget is $500,000. Theyhave $100,000 for the down payment and McCormick will pay forclosing costs. They are considering either a 30-year mortgage at4.5 percent annual rate or a 15 year mortgage at 4 percent.Calculate the monthly payment for each. Property taxes andinsurance will add $1,000 per month to which ever mortgage theychoose. What should Kathy and Stan do?
