Tutor profile: Rahul M.
Subject: Corporate Finance
Explain why the WACC curve (U-shaped) is shaped that way.
It is mainly because of the crystallization of debt, which means that until a cost of debt is cheaper than cost of equity WACC curve shall go downwards. The moment we take more and more deb, riskiness in the business increases and hence the cost of debt also increases. This increase in the cost of debt leads to an increase in WACC curve making it U-Shaped.
Lucy Brown wants to give her daughter $35,000 to start her own business in 10 years. How much should she invest today at an annual interest rate of 9% to have $35,000 in 10 years?
Okay, so this problem is related to the time value of money concept of Corporate Finance. We have been given inputs such as: Lucy Brown wants to give her daughter $35,000 in 10 years <<<this will be Future Value (FV) since this is what we need in Future (in 10 years). This impliedly states that time horizon is 10 years<<< i.e. No. of periods (N) would be 10 years. Interest Rate has been given as 9% at which invested money shall grow. << hence I/Y would be 9%. There are no annuity payments in between those 10 years, hence PMT would be zero Now, we need to compute how much she needs to invest today so that she is able to give $35,000 in the next 10 years. This investment amount today is called Present Value (PV) in TVM (Time Value of Money) terms. Let’s put the above data into the below table: N 10 I/Y 9% PV To be Computed PMT 0 FV $35,000 Using PV function and putting the above inputs >> we shall get $14,784.38 Here is the syntax for your reference: =PV(9%,10,0,35,000,0)
Assume that the facts are the same as noted in Facts C except for the following: Joe intends to contribute Property A with fair market value (“FMV”) of $800 and basis of $300. At that time of contribution, Property A was encumbered with $300 debt financed from Bank A. Sunny intends to contribute cash of $800. For purposes of this question, Joe and Sunny are equal owners. Provide Joe’s basis in MII upon contribution (i.e., Year 0) of Property A. Provide Sunny’s basis in MII upon contribution (i.e., Year 0) of cash. Provide MII’s basis in Property A and cash immediately after contribution.
In case of ‘S’ Corporation, the initial stock basis is computed by the amount of cash given to S Corporation or through the fair market value of any property contributed to the corporation less any debt attached to the property contributed. In this case, Joe’s basis in S Corporation would be computed as the FMV (Fair Market Value) of the property contributed less any debt taken on this property (assuming Joe has transferred property along with the committed debt) Therefore the basis shall be $800 i.e. FMV of the property less $300 of debt outstanding. Hence, it shall be $500. Sunny’s basis in S Corporation would simply be the cash it has contributed to S Corporation Therefore the basis shall be $800 i.e. Cash paid to MII. MII’s basis in Property A would be the FMV of the property at which it was transferred i.e. $800. MII’s basis in Cash is straightforward i.e. Cash actually lying in the corporation i.e. $800
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