5. A company «X» is planning to issue bonds with Face Value of 1000 rubles and a
ID: 2811061 • Letter: 5
Question
5. A company «X» is planning to issue bonds with Face Value of 1000 rubles and annual coupon rate of 8%. Bonds will mature in 5 years. coupons are paid annually. The number of outstanding bonds is 1000 000. Profit tax rate is 20%. What is the cost of this source of capital? 6.Construct after-tax cash flows. Working capital is estimated as 25% of sales Revenues 3000 3 600 4200 4500 500 ting Ex Salaries Raw Material 00 330 360 390 40 1500 1900 2200 2500 280 400 400 400 400 40 ciationn ating Income Taxes (20%) ating Income After Taxe apital Expenditure ter tax 1000 ating Income ation hange in Working Capital After-tax Cash Flows 7. Harold Filbert is 30 years of age and his salary next year will be S20,000. Harold forecasts that his salary will increase at a steady rate of 5 percent per annum until his retirement at age 60 a. If the discount rate is 8 percent, what is the PV of these future salary payments? b. If Harold saves 5 percent of his salary each year and invests these savings at an interest rate of 8 percent, how much will he have saved by age 60?Explanation / Answer
5. Fcae value= $1000
No.of bonds= 1000,000
coupan rate= 8% , term=5yrs
Tax rate= 20%
Cost of debt(kd)= Interest(1-Tax rate)/ net proceeds
Interest= (10 lakh bonds* 1000)8%= $800lakh
tax amount= 800lakh*20%= $160lakh
therefore, cost of debt= $800lakh- 160lakh/10000lakh= 6.4%
6. PARTICULARS YEARS
Revenues 1 2 3 4 5
Revenues $3000 3600 4200 4500 5000
Expenses ($2200) ($2630) ($2960) ($3290) ($3600)
Profit before tax $800 $970 $1240 $1210 $1400
Tax@20% ($160) ($194) ($248) ($242) ($280)
Profit after tax $640 $776 $992 $968 $1120
(+)Depreciation $400 $400 $400 $400 $400
Cash inflows(1-6 yrs) $1040 $1176 $1392 $1368 $1520
(+) working capital(25%of sales) $1250
Cash inflow- 7th year $2770
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