Newly issued 10-year bond Calculate the Present Value in the three scenarios below Present Value at Issuance Present Value Periods Interest Payments Future Value ($61,027.09) PV 20 Semi-annual payment: 2017-2027 2.50% Interest paid semi-annually 0 This bond make regular semi-annual payments of interest (entered in $ dollars semiannually). PMT FV $100,000 Future Value in 10 years Bonds Original Face Value 2. The new value of the bond if overall rates in the market decreased by 2% ($74,247.04) Present Value PV 20 Semi-annual payment: 2017-2027 1.50% Please adjust interest 0 This bond make regular semi-annual payments of interest (entered in $ dollars semiannually) Periods N Interest Payments PMT FV $100,000 Future Value in 10 years Bonds Original Face Value Future Value
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
What effect would the calculations performed have in terms of the company’s decision to raise capital in this manner? In other words, if overall rates in the market decreased by 2%, would bond valuation to be a viable option for increasing capital? Be sure to justify reasoning.
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