The selection of the investment in the product using pay-back period. Introduction: Pay-back period (PBP) : It is one of the methods of capital budgeting that helps evaluate the time period in which the amount of initial investment is recovered. The formula for the calculation of the PBP is shown below: Pay-Back Period = Year + Initial Investment − Cumulative Cash Flow Cash FLow Where, Year = The year in which cumulative cash flow is near and less than the initial investment. Initial investment = The amount of the investment. Cumulative cash flow = The cumulative cash flow which is near and less than the initial investment. Cash flow = The cash flow of the next year from the â€œYearâ€� used for the calculation.

Question

Potter & Lopez Inc. just sold a bond with 50 warrants attached. The bonds have a 20-year maturity and an annual coupon of 12%, and they were issued at their $1,000 par value. The current yield on similar straight bonds is 15%. What is the implied value of each warrant? Ο $4.35 O $3.76 O $4.56 O $4.14 O $3.94

Answer 1

Question

Chapter 12, Problem 6P

Summary Introduction

To calculate: The selection of the investment in the product using pay-back period.

Introduction:

Pay-back period (PBP):

It is one of the methods of capital budgeting that helps evaluate the time period in which the amount of initial investment is recovered. The formula for the calculation of the PBP is shown below:

Pay-Back Period=Year+Initial Investment−Cumulative Cash FlowCash FLow

Where,

Year = The year in which cumulative cash flow is near and less than the initial investment.

Initial investment = The amount of the investment.

Cumulative cash flow = The cumulative cash flow which is near and less than the initial investment.

Cash flow = The cash flow of the next year from the â€œYearâ€� used for the calculation.

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