Acme Chemical, Inc. is a major manufacturer of chemical products for the agriculturalndustry, including pesticides, herbicides and other compounds. Due to a number of law suitselated to toxic wastes, Acme Chemical has recently experienced a market re-evaluation of itscommon stock. The firm also has a bond issue outstanding with 10 years to maturity and anannual coupon rate of 5 percent, with interest paid semi annually. The required nominal marketannual interest rate on this bond has now risen to 10 percent due to the high risk level associatedvith this firm. The bonds have a par or face value of $1,000.1. Label each of the variables that you would use to determine the value of this bond in themarket today:N (time periods until maturity)PMT (periodic interest payment)I per (periodic market interest rate)EV (future value to be received when the bond matures) =2. Based on the variables that you have identified in Question #1, what is the market value.today (the present value or PV) of one of Acme Chemical's bonds? aLabel each of the variables that you would use to determine the new value of this bondin the market:N (time periods until maturity)PMT (periodic interest payment)I per (periodic market interest rate)EV (future value to be received when the bond's mature) =b Based on the variables that you have identified in Question #3.a., what is the new marketvalue (the present value or PV) of one of Acme Chemical's bonds, following their victoryin appeals court?1. Why do you suppose that the market value of Acme Chemical's bonds has risen following thefirm's victory in appeals court?

Bonds Bonds are referred to as fixed-income instruments which show a loan made by an investor to a…

Answered: Acme Chemical, Inc. is a major…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Five years ago, NorthWest Water (NWW) issued $50,000,000 face value of 30-year bonds carrying a 14% (annual payment) coupon. NWW is now considering refunding these bonds. It has been amortizing $3 million of flotation costs on these bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today's market. A call premium of 14% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NWW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called. a. What is the required after-tax refunding investment outlay, i.e., the cash outlay at the time of the refunding? b. What will the after-tax annual interest savings for NWW be if the refunding takes place?
Kasey Hartman is the controller for Wholemart Company, which has numerous long-term investments in debt securities. Wholemart’s investments are mainly in five-year bonds. Hartman is preparing its year-end financial statements. In accounting for long-term debt securities, she knows that each long-term investment must be designated as a held-to-maturity or an available-for-sale security. Interest rates rose sharply this past year, causing the portfolio’s fair value to substantially decline. The company does not intend to hold the bonds for the entire five years. Hartman also earns a bonus each year, which is computed as a percent of net income. Required 1. Will Hartman’s bonus depend in any way on the classification of the debt securities? Explain. 2. What criteria must Hartman use to classify the securities as held-to-maturity or available-for-sale? 3. Is there likely any company oversight of Hartman’s classification of the securities? Explain.
Global Products plans to issue long-term bonds to raise funds to finance its growth. The company has existinGlobal Products plans to issue long-term bonds to raise funds to finance its growth. The company has existing bonds outstanding that are similar to the new bonds it expects to issue. The existing bonds have a face value equal to $1,000, mature in 10 years, pay $60 interest annually, and are currently selling for $1,077 each. Global’s marginal tax rate is 40 percent. (a) What should be the coupon rate on the new bond issue? (b) What is Global’s after-tax cost of debt?g bonds outstanding that are similar to the new bonds it expects to issue. The existing bonds have a face value equal to $1,000, mature in 10 years, pay $60 interest annually, and are currently selling for $1,077 each. Global’s marginal tax rate is 40 percent. (a) What should be the coupon rate on the new bond issue? (b) What is Global’s after-tax cost of debt?
Mullet Technologies is considering whether or not to refund a $75 million, 13% coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $8 million of flotation costs on the 13% bonds over the issue's 30-year life. Mullet's investment banks have indicated that the company could sell a new 25-year issue at an interest rate of 9% in today's market. Neither they nor Mullet's management anticipate that interest rates will fall below 9% any time soon, but there is a chance that rates will increase. A call premium of 11% would be required to retire the old bonds, and flotation costs on the new issue would amount to $6 million. Mullet's marginal federal-plus-state tax rate is 30%. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term government securities returning 5% annually during the interim period. Conduct a complete bond refunding analysis. What is the bond refunding's NPV? Do not round intermediate…
Retlaw Corporation (RC) manufactures time-series photographic equipment. It is currently at its target debt-equity ratio of 0.88. It's considering building a new $39 million manufacturing facility. This new plant is expected to generate after-tax cash flows of $8.5 million in perpetuity. The company raises all equity from outside financing. There are three financing options: 1. A new issue of common stock: The flotation costs of the new common stock would be 10% of the amount raised. The required return on the company's new equity is 14%, 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 4% of the proceeds. If the company issues these new bonds at an annual coupon rate of 8.0%, they will sell at par. 3. Increased use of accounts payable financing: Because this financing is part of the company's ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of…
Landman Corporation (LC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of 75. It's considering building a new $41 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $5.3 million in perpetulty. The company raises all equity from outside financing. There are three financing options: 1. A new issue of common stock. The flotation costs of the new common stock would be 7.1 percent of the amount raised. The required return on the company's new equity is 15 percent. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 2.7 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 5.7 percent, they will sell at par. 3. Increased use of accounts payable financing. Because this financing is part of the company's ongoing daily business, it has no flotation costs and the company assigns it a cost that is the same as the overall firm WACC.…
Mullet Technologies is considering whether or not to refund a $75 million, 14% coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $6 million of flotation costs on the 14% bonds over the issue's 30-year life. Mullet's investment banks have indicated that the company could sell a new 25-year issue at an interest rate of 10% in today's market. Neither they nor Mullet's management anticipate that interest rates will fall below 10% any time soon, but there is a chance that rates will increase. A call premium of 8% would be required to retire the old bonds, and flotation costs on the new issue would amount to $4 million. Mullet's marginal federal-plus-state tax rate is 40%. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term government securities returning 6% annually during the interim period. Conduct a complete bond refunding analysis. What is the bond refunding's NPV? Do not round intermediate…
On January 1, 2010 NukePower purchased a one-year $25,000,000 debt instrument that (1) guarantees the repayment of principal, (2) has a 1.50% annual coupon, and (3) provides for an additional return that is indexed to the price of Uranium (URA). Specifically, if the price of URA is above $850 per metric ton on 12/31/10, the holder of the debt receives an additional return equal to the difference between the market price and the $850 per metric ton threshold price, based on 12,500 metric tons of URA. The additional return feature is not separable from the host debt instrument. The yield to maturity on a similar quality debt instrument which does not have an additional return feature is 7.00% annually (based on annual interest), which would result in an issuance price of $23,714,953. Details on the price of URA, URA Call and Put options is provided below. Any interest calculations should use annual interest. The embedded option is designated as and qualifies as a cash flow hedge of…
The MillerCorp would like to acquire its competitor, the ModiglianiCorp. To pay for the acquisition expenses, it is intending to issue bonds that pay semiannual coupon payments. These corporate bonds would have a coupon rate of 7 percent and their YTM would be 5 percent. The bonds would have 11 years left until their maturity. Interestingly, the ModiglianiCorp has the same plan. It wants to take a loan to acquire its competitor, the MillerCorp, by issuing corporate bonds. In fact, it already recently sold bonds for this purpose. Like the MillerCorp's bonds, its bonds pay coupons twice a year, have a 5 percent coupon rate, have a YTM of 7 percent, and they mature 11 years from today. How much money can each company borrow by selling each of its bonds? Both corporations' bonds have a $1,000 par value. In addition, if future bond rates remain unchanged, what will be the prices for both companies' bonds 1 years from now? What about 2 years, 6 years, 10 years, and 11 years from now? (Do not…
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To help finance a major expansion, a company sold a noncallable bond several years ago that now has 15 years to maturity. This bond has a 5% annual coupon, paid semiannually, it sells at a price of $985, and it has a par value of $1,000. If the company’s tax rate is 28%, what component cost of debt should be used in the WACC calculation?
Continental container corp. has decided to raise additional capital by issuing a $300,000 face-value of bonds with a coupon rate of 10%. in discussions with their investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of 10 warrants for each $1,000 bond sold. the value of the bonds without the warrants is considered to be $279,000, and the value of the warrants in the market is $10.3333 each. the bonds sold in the market at issuance and the company received $306,000 in cash. Required: Prepare the journal entry to record the issuance of the bonds and warrants.

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