12.BBG Corporation just issued 20-year, 10 percent coupon bonds, for which the f

Question

12.BBG Corporation just issued 20-year, 10 percent coupon bonds, for which the firm incurred the flotation costs equal to 4.0 percent of the $1,000 face value. Interest is paid semi-annually and the firm is in the 30 percent corporate tax bracket. If investors are willing to pay $1,025 for each of the bonds, what is the after-tax cost of debt for bonds?

10.18 percent

9.72 percent

7.12 percent

8.24 percent

6.80 percent

13.CTO Transport has issued a 30-year bonds. The bond is currently sold for $1,054 and has a par value of $1,000. Interest is paid semiannually. If investors’ required rate of return is 8.5 percent, how much interest payment does this bond make each year?

$80

$45

$90

$75

$65

14.Walt has $100 in his bank account today. If the interest rate is 15.5 percent compounded annually, how much cash will he have in 100 years?

$987,445,221

$1,000,000

$181,216,785

$16,554,223

$10,000

15.Tyler Industries recently paid the annual common stock dividend of $2.00. The dividend amount is projected to grow at the annual rate of 30 percent for the next 2 years. Starting in the third year, the growth rate is expected to stay constant at the annual rate of 5 percent for the foreseeable future. If the required rate of return is 15 percent, what is the value of this stock?

$39.56

$37.12

$31.65

$33.74

$35.68

16.Alabaman Energy Corp’s common stock paid $1.00 dividend last year and dividends are expected to grow at a constant rate for the foreseeable future. If the stock’s value is currently $22 and the investors’ required rate of return on the stock is 15 percent, what is the growth rate projected?

7.5 percent

10.0 percent

15.0 percent

12.5 percent

5.0 percent

17.The Lumber Shack issued bonds that have exactly 9 more years until maturity with an 8 percent annual coupon rate. Interest is paid semiannually. If the bond is currently sold for $1,020 and has a par value of $1,000, what is its yield to maturity?

7.69 percent

6.95 percent

7.41 percent

7.21 percent

7.35 percent

18.The Template Corporation is considering a project that provides a $0 annual cash inflow for the first five years and then provides $900,000 per year for the subsequent five years. The project requires an initial investment of $1.8 million. If the firm’s required rate of return for this project is 9.0 percent, what is the net present value?

$620,320

$515,221

$560,750

$686,813

$475,206

19.Suppose that the exchange rate between the U.S. dollar and the British pound is $1.25/£. Suppose further that the exchange rate between the U.S. dollar and the Euro is $1.10 per Euro. What is the cross-rate between the British pound and the Euro?

€0.962/£

€1.136/£

€1.088/£

€0.880/£

€1.196/£

20.Ernst would like to purchase a specific house in Los Angeles. The house costs exactly $150,000 today but housing prices in Los Angeles are expected to increase by 8.5 percent per year for the next 20 years. He plans to make equal amount of monthly payments into a saving account for the next 20 years, starting one month from today, in order to save enough money. If his account earns 12 percent annual interest, what should the amount of each deposit be?

$1,205,42

$525.12

$775.14

$1,020.50

$935.86

Explanation / Answer

Time = 20 Years (full)

Time = 40 semi-annual periods

Face Value of the bond= $1000

Floatation cost is 4%

So Net Face Value of the bond = $1000*(1-0.04) = $960

Market Price of the bond = $1025

Coupon Interest Yearly = $1000*10% = $100

So, coupon interest (semi-annually) =$50

Market Price per bond = Coupon Interest * pvifa (ytm%/2, 40periods) + Net face Value* pvif* (ytm%/2, 40 periods)

1025 = 50* pvifa (ytm%/2, 40) + 960* pvif (ytm%/2, 40)

Now interpolating the results,

Let us suppose r= 5%

1025 = 50*(17.16) + 960* (0.142)

1025 = 994.32

Let us suppose r = 4.5%

1025 = 50*(18.40) + 960* (0.172)

1025 = 1085.12

994.32-1085.12/ 994.32-1025 = 5-4.5/5-r

-90.8/ -30.68 = 0.5/5-r

0.5*30.68/90.8 = 5-r

0.169 = 5-r

Or, r = 5-0.169= 4.83%

So Yearly rate = 4.83%*2 = 9.66%

Tax Rate is 30%

Post Tax cost of Debt = 9.66* (1-0.3) = 6.77%

So the best option is 6.80% which is the last one

Hence Post Tax cost of Debt is 6.80%

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