1.Suppose you own two assets with the following payouts. (1) $250 at the end of

Question

1.Suppose you own two assets with the following payouts. (1) $250 at the end of every year starting 1 year from now. The annual cost of capital for these cash flows is 12%. (2) $850 one year from now and a cash flow that is 3% larger than the prior cash flow every year thereafter. The annual cost of capital for these cash flows is 15%. What is the weighted average cost of capital of this two asset portfolio? (enter your answer as a percent, e.g. 2.51. Do not include the "%" sign).

2.Suppose that you will need to save $1650000 over the next twenty years to retire comfortably. What constant annual payment (20 payments) will you need to make to save this amount if the you can earn 10% annually?

3.Suppose that you take out a loan for $180000 to purchase a house. You are required to make monthly payments, and the APR is 6.5%. How much interest will you end up paying over the life of the loan (30 year mortgage)?

Explanation / Answer

1.

Present value of First assets = $250 / 12%

= $2,083.33

Present value of send assets = $850 / (15% - 3%)

= $7,083.33.

Present value of total assets = $2,083.33 + $7,083.33

= $9,166.67.

Present value of total assets is $9,166.67.

Weight of first assets = $2,083.33 / $9,166.67

= 22.73%

Wwight of second assets = $7,083.33 / $9,166.67

= 77.27%

Now, WACC is calculated below:

WACC = (22.73% × 12%) + (15% × 77.27%)

= 2.73% + 11.59%

= 14.32%

WACC of investment is 14.32%.

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