Faisal is trying to figure out the price lie should pay for a Corporate Bond wit
ID: 1920505 • Letter: F
Question
Faisal is trying to figure out the price lie should pay for a Corporate Bond with a $10,000 face value. His minimum acceptable return is 10% per year, compounded semi-annually. Erin, the company representative wants him to pay $8,000 for the bond and in return he will get a 6% coupon rate semiannually and the face value of the bond after 8 years. Will the investment meet Faisal's minimum acceptable return of 10% or is Erin trying to pull a fast one? SHOW WORK Chris Construction just purchased a new piece of equipment. The equipment cost is $300,000. They think they can salvage the equipment for $50,000 in five years. Calculate the Straight-Line Depreciation. Using your straight-line depreciation, what is the book value of the Equipment in Year 3? Calculate the Depreciation in Year 3 using the MACRS and a five year life span.Explanation / Answer
9)
return in 'n' years from corporate bond X = (10,000)(1+0.1)2n since compunded semianually
return in 'n' years from company bond Y = (8,000)(1+0.06*2n)
for n=8, Y=15680
X=11725.78645
since Y>X , the investment will meet Faisal's mimum acceptable return of 10%
10)
a)Depreciation per annum = (Cost - Residual Value) / Useful Life
=(300,000-50,000)/5
=50,000 per annum
Straight line method depreciates cost evenly through out the useful life of the fixed asset.
b) book value after 3 years = 300,000-3*(depreciation per annum)
=300,000-3*50,000
=300,000-150,000
=150,000
c)
Depreciation in 1st Year =Cost * A/Useful Life
=300,000/5
=60,000
Depreciation in Subsequent Years =(Cost ? Depreciation in Previous Years)/Recovery Period
Depreciation in second year=(300,000-60,000)/5
=240,000/5 = 48,000
Depreciation in thurd year = (300,000-48,000)/5
=50,400
Total Depriciation =Depreciation in 1st year +second year + third year = 60,000 +48,000+50,400
=158,400
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