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1
1.You have just taken on a 30-year, 6%, $300,000 mortgage and would like to pay it off in 20 years. By how much will your monthly payment have to change to accomplish this objective? (Please show all your calculations).
2.You have been asked to calculate the cost of equity for three firms- Eastern, Western, and Northern. You know the following: Firm Beta Cost of Debt Debt/Assets Eastern 1.10 3.8% 50% Western 1.20 4.35% 65% Northern 1.15 4.1% 57% You know the following: • 10-year Treasury yield = 3.20% • Market Premium = 5.0% • Average Tax Rate = 21% What are the expected returns on equity and WACCs for each of these firms?
A B E 1 ? D Cost of Equity Beta Market Premium 2 R. Equity Cost 3 Eastern 4 Western 5 Northern 6 7 Cost of Debt 8 RI Debt/Assets 9 Eastern 10 Western 11 Northern 12 13 Weighed Average Cost of Capital WACC 14 15 Eastern 16 Western 17 Northern 18 19 Tax
Expert Solution
1.Total amount to be paid after 30 years = $300,000* [1+(6/100)]30
= $300,000* (106/100)30
=$300,000*5.74
=$1,723,047.35
Total Interest paid in the course of 30 years = $1,723,047.35 - $300,000
=$1,423,047.35
Interest to be paid per month for the course of 30 years = $1,423,047.35/360
=$3,952.91
Total amount to be paid after 20 years = $300,000* [1+(6/100)]20
= $300,000* (106/100)20
= $300,000*3.21
= $962,140.64
Total Interest paid in the course of 20 years = $962,140.64 - $300,000
=$662,140.64
Interest to be paid per month for the course of 20 years = $662,140.64/240
=$2,758.92
Therefore, the monthly rental payment would decrease by $(3,952.91 - 2,758.92) = $1193.99, if i would pay my mortgage in 20 years.
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