(Cost of debt) Sincere Stationery Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 14 percent and a maturity of 10 years. The investors require a rate of return of 9 percent. a. Compute the market value of the bonds. b. What will the net price be if flotation costs are 10.5 percent of the market price? c. How many bonds will the firm have to issue to receive the needed funds? d. What is the firm's after-tax cost of debt if its average tax rate is 25 percent and its marginal tax rate is 21 percent? e. Rework the problem as follows: Assume a coupon rate of 8 percent. 1. What effect does changing the coupon rate have on the firm's after-tax cost of capital? Why is there a change?

(Cost of debt) Sincere Stationery Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 14 percent and a maturity of 10 years. The investors require a rate of return of 9 percent. a. Compute the market value of the bonds. b. What will the net price be if flotation costs are 10.5 percent of the market price? c. How many bonds will the firm have to issue to receive the needed funds? d. What is the firm's after-tax cost of debt if its average tax rate is 25 percent and its marginal tax rate is 21 percent? e. Rework the problem as follows: Assume a coupon rate of 8 percent. 1. What effect does changing the coupon rate have on the firm's after-tax cost of capital? Why is there a change?

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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Third Mortgage Investors makes money by purchasing mortgage backed securities (MBS), stripping them into interest only (IO) and principal only (PO) components, and selling the components for more than it paid for the original security. Suppose the company purchases a $100,000 Face value MBS carrying a coupon of 9 percent and a maturity of 30 years. Assume for the purpose of the following analysis, the MBS will make payments on an “ANNUAL BASIS.” What is the remaining principal balance on the MBS if it survives 1-year? 3-years? 5 years? 8 years?
Many companies look to re-finance their outstanding debt when interest rates fall significantly. Javert Toy Company has $50.00 million in debt outstanding that pays an 8.75% APR coupon. The debt has an average maturity of 10.00 years. The firm can refinance at an annual rate of 5.25%. That is, investors want 5.25% today for bonds of similar risk and maturity. How much will Javert save on interest payments with this re-finance? You can assume that Javert will issue debt to cover the full price of repurchasing the old debt from part A. (answer in terms of millions, so 1,000,000 would be 1.00) Submit Answer format: Currency: Round to: 4 decimal places.
Selling bonds. Lunar Vacations needs to raise $6,300,000 for its new project (a golf course on the moon). Astro Investment Bank will sell the bond for a commission of 2.7%. The market yield is currently 7.8% on twenty-year semiannual bonds. If Lunar wants to issue a 5.9% semiannual coupon bond, how many bonds will it need to sell to raise the $6,300,000? Assume that all bonds are issued at a par value of $1,000.
None
Imagination Dragons Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 20-year zero coupon bonds with a par value of $1,000 each to raise the money. The required return on the bonds will be 8 percent. Assume semiannual compounding periods. a. What will these bonds sell for at issuance? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Using the IRS amortization rule, what interest deduction can the company take on these bonds in the first year? In the last year? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) c. Repeat part (b) using the straight-line method for the interest deduction. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. b. C. Issue price First year interest deduction Last year interest deduction Interest deduction $ $ 208.29 39.58
Km for the following Individual or component costs of capital) Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this compute the cost of capital for the a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 11.4 percent mat is paud semiannually. The bond is currently selling for a price of $1,121 and will mature in 10 years The firm's tax rate is 34 percent b. If the firm's bonds are not frequently traded, how would you go about determining a cost of debt for this company? A new common stock issue that paid a $174 dividend last year. The par value of the stock is $15, and the firm's dividends per share have grown at a rate of 81 percent per year. This growth rate is expected to continue into the foreseeable tuture The pnce of this stock is now $27 12 d. A preferred stock paying a 10.7 percent dividend on a $126 par value The preferred shares are currently selling for…
Suppose your company needs to raise $35.8 million and you want to issue 23- year bonds for this purpose. Assume the required return on your bond issue will be 8.3 percent, and you?re evaluating two issue alternatives: a 8.3 percent semiannual coupon bond and a zero coupon bond. Your company's tax rate is 35 percent. Requirement 1: (a) How many of the coupon bonds would you need to issue to raise the $35.8 million? (b) How many of the zeroes would you need to issue? Requirement 2: (a) In 23 years, what will your company's repayment be if you issue the coupon bonds? (b) What if you issue the zeroes? Requirement 3: Assume that the IRS amortization rules apply for the zero coupon bonds. Calculate the firm's aftertax cash outflows for the first year under the two different scenarios.
Selling bonds. Lunar Vacations needs to raise $5,600,000 for its new project (a golf course on the moon). Astro Investment Bank will sell the bond for a commission of 2.8%. The market yield is currently 7.9% on twenty-year semiannual bonds. If Lunar wants to issue a 6.4% semiannual coupon bond, how many bonds will it need to sell to raise the $5,600,000? Assume that all bonds are issued at a par value of $1,000. How many bonds will Lunar need to sell to raise the $5,600,000? (Round to the nearest whole number.)
Write the formula for the cost of capital. Explain how you would estimate each component of the cost of capital. Assume you would like to estimate the cost of debt for XYZ Company. XYZ’s bond has a semi-annual 5.25 % coupon rate and a par value of $1,000, with a market price of 86 percent of the par. Assume a number of years to maturity that has not been chosen by any other students between 10 to 50 years, then estimate the cost of debt for XYZ. Assume the beta of XYZ is 1.20, and the capital structure of XYZ is 70 % equity financing and 30 % debt financing, and the tax rate is 21 %. Estimate the cost of capital for XYZ Company.
Suppose you are trying to raise $63415947 to fund a project and you are going to use 42% debt. An American corporate bond has a coupon rate of 1.8% and matures in 25 years. If the yield to maturity for bonds similar to this one is 9.0%, what is the number of similar bonds you would need to sell to raise the necessary funds? Suppose you are trying to raise $71898234 to fund a project and you are going to use 46% debt. An American corporate bond has a coupon rate of 1.4% and matures in 24 years. If the yield to maturity for bonds similar to this one is 3.8%, what is the number of similar bonds you would need to sell to raise the necessary funds?

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