Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Chapter 5, Problem 52SP
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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 11 percent. Assume semiannual compounding periods.
a.
What will these bonds sell for at issuance?
b.
Using the IRS amortization rule, what interest deduction can the company take on these bonds in the first year? In the last year?
c.
Repeat part (b) using the straight-line method for the interest deduction.
U.S. Delay Corporation, a subsidiary of the postal service, must decide whether to issue zero coupon bonds or quarterly payment bonds to fund construction of new facilities. The $1,000 par value quarterly payment bonds would sell at $795.54, have a 4.50% coupon rate, and mature in 10 years. At what price would the zero coupon bonds with a maturity of 10 years have to sell to earn the same effective annual rate (or bond yield) as the quarterly payment bonds?
Notable nothings plans to issue new bonds with the same yield as its existing bonds. the existing bonds have a coupon rate of interest equal to 5.6 percent (semiannual interest payments), 12 years remaining until maturity, and a $1,000 maturity value; they are currently selling for $918 each. (a) if notable issues new bonds today, what will its before-tax cost of debt be? (b) what will be its before-tax cost of debt if the price of its existing bonds is $730 when notable issues the new bonds
Chapter 5 Solutions
Foundations Of Finance
Ch. 5 - Prob. 1RQCh. 5 - The processes of discounting and compounding are...Ch. 5 - Prob. 3RQCh. 5 - Prob. 4RQCh. 5 - Prob. 5RQCh. 5 - Prob. 1SPCh. 5 - Prob. 2SPCh. 5 - Prob. 3SPCh. 5 - Prob. 4SPCh. 5 - Prob. 5SP
Ch. 5 - (Compound value) Stanford Simmons, who recently...Ch. 5 - (Future value) Sarah Wiggum would like to make a...Ch. 5 - Prob. 8SPCh. 5 - (Future value) Giancarlo Stanton hit 59 home runs...Ch. 5 - Prob. 10SPCh. 5 - Prob. 11SPCh. 5 - Prob. 12SPCh. 5 - Prob. 13SPCh. 5 - Prob. 14SPCh. 5 - Prob. 15SPCh. 5 - Prob. 16SPCh. 5 - Prob. 17SPCh. 5 - Prob. 18SPCh. 5 - Prob. 19SPCh. 5 - Prob. 20SPCh. 5 - Prob. 21SPCh. 5 - Prob. 22SPCh. 5 - Prob. 23SPCh. 5 - Prob. 24SPCh. 5 - (Solving for PMT of an annuity) To pay for your...Ch. 5 - Prob. 26SPCh. 5 - Prob. 27SPCh. 5 - (Loan amortization) On December 31, Beth Klemkosky...Ch. 5 - (Solving for r of an annuity) You lend a friend...Ch. 5 - Prob. 30SPCh. 5 - (Compound annuity) You plan on buying some...Ch. 5 - (Loan amortization) On December 31, Son-Nan Chen...Ch. 5 - (Loan amortization) To buy a new house you must...Ch. 5 - Prob. 34SPCh. 5 - Prob. 35SPCh. 5 - Prob. 36SPCh. 5 - Prob. 37SPCh. 5 - Prob. 38SPCh. 5 - (Compound interest uith nonannnal periods) a....Ch. 5 - (Compound interest with nonannual periods) After...Ch. 5 - Prob. 41SPCh. 5 - (Spreadsheet problem) To buy a new house you take...Ch. 5 - (Nonannual compounding using a calculator) Jesse...Ch. 5 - (Nonannual compounding using a calculator)...Ch. 5 - (Nonannual compounding using a calculator) Fords...Ch. 5 - Prob. 46SPCh. 5 - (Nonannual compounding using a calculator) Dennis...Ch. 5 - Prob. 48SPCh. 5 - (Calculating the effective annual rate) Youve just...Ch. 5 - Prob. 50SPCh. 5 - Prob. 51SPCh. 5 - (Present value) The Kumar Corporation is planning...Ch. 5 - (Perpetuities) What is the present value of the...Ch. 5 - (Complex present value) How much do you have to...Ch. 5 - (Complex present value) You would like to have...Ch. 5 - Prob. 56SPCh. 5 - Prob. 57SPCh. 5 - Prob. 58SPCh. 5 - Prob. 59SPCh. 5 - (Present value of a complex stream) Don Draper has...Ch. 5 - (Present value of a complex stream) Don Draper has...Ch. 5 - (Complex stream of cash flows) Roger Sterling has...Ch. 5 - (Future and present value using a calculator) In...Ch. 5 - Prob. 1MCCh. 5 - Prob. 2MCCh. 5 - Prob. 3MCCh. 5 - Prob. 4MCCh. 5 - Prob. 5MCCh. 5 - Prob. 6MCCh. 5 - Prob. 7MCCh. 5 - Prob. 8MCCh. 5 - Prob. 9MCCh. 5 - Prob. 10MCCh. 5 - Prob. 11MC
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- Unless stated otherwise, interest is compounded annually, and payments occur at the end of the period. Face value for bonds is $1000 Zain Inc. is about to launch a new product. There are three possible outcomes for next year, depending on the success of the launch: $270 million, $120 million or $90 million. These outcomes are all equally likely. The interest rate is 6%. (Ignore all other market imperfections, such as taxes.). Zain has $130 million in debt due next year. a. What is Zain's total value with leverage? b. Now suppose that in the event of default, 40% of the value of Zain's assets will be lost to bankruptcy costs. What is Zain's total value with leverage and distress costs?arrow_forwardA company must make a payment of $2500 in 5 years. Four-year zero coupon bonds and seven-year zero coupon bonds are available for investment. These bonds could be purchased in any quantity and the yield rate is 3% effective. Let A and B be the face values of the 4-year and 7-year zero-coupon bonds, respectively, that are purchased to satisfy full immunization against any changes in interest rates. Find A. Possible Answers A 1262 1431 C 1618 D 1725 E 1962arrow_forwardGerald Morris Corporation (GM) plans to issue bonds to raise $95 million. GM's investment banker will charge flotation costs equal to 5 percent of the total amount issued. The market value of each bond at issue time will be $1,000. How many bonds must GM sell to net $95 million after flotation costs? Assume that fractions of bonds cannot be issued. Show how much of the total amount issued will consist of flotation costs and how much GM will receive after flotation costs are paid.arrow_forward
- (b) The total principal value of Clatterbridge Ltd bonds is $165 million, and the bonds have an annual coupon rate of 6 percent. The total cost of refunding would be 8 percent of the principal amount raised. The appropriate tax rate for the company is 30 percent. Assume the bonds were issued at par value and that coupons are paid annually. Required: How low does the market interest rate need to drop to justify refunding with a new bond issue?arrow_forwardPlease fully explainarrow_forwardWilliams Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 7 percent, payable annually, and a par value of $1,000. The one-year interest rate is 7 percent. Next year, there is a 40 percent probability that interest rates will increase to 9 percent and a 60 percent probability that they will fall to 6 percent. a. What will the market value of these bonds be if they are noncallable? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. If the company decides instead to make the bonds callable in one year, what coupon rate will be demanded by the bondholders for the bonds to sell at par? Assume that the bonds will be called if interest rates fall and that the call premium is equal to the annual coupon. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What will be the value of the call provision to the company? (Do not round…arrow_forward
- Global Products plans to issue long-term bonds to raise funds to finance its growth. The company has existing bonds that are similar to the bonds it expects to issue. The existing bonds have a face value of $1000, mature in 10 years, pay $60 interest coupon annually, and are currently selling for $1077 each. (Therefore, the current YTM on the bonds is 5 percent.) Assume that Global will issue the new bonds at an interest rate cost of 5 percent based on the current YTM on its existing bonds. Global's marginal tax rate is 40%. What is the after-tax cost of debt?arrow_forwardThatcher Corporation’s bonds will mature in 10 years. The bonds have a face value of $1,000 and an 8 percent coupon rate, paid semiannually. The price of the bond is $1,100. What is the firm’s cost (percentage rate) of borrowing money under these market conditions?arrow_forwardIf company A wants to raise 20-24million through bonds, and company B wants to invest in company A. In the conditions company A currently pays semi-annual interest of $100, as the bonds age for 30 years and the value is $2000per bond and interest is 16%. 1) What cash flow would need to be expected for company B to purchase the bond in the fifth and the final payment. 2)If the value of the bond was equal to $2400 should company B invest in the bond of company A. Provide all calculations and formulas used for pricing.arrow_forward
- (Please finanas question correct answer)arrow_forwardKiss Greetings planned to raise $500,000 by issuing bonds. The bond certificates were printed bearing a stated interest rate of 6%, which was equal to the yield rate of interest. However, before the bonds could be issued, economic conditions forced the yield rate up to 7%. If the life of the bonds is 10 years and interest is paid annually on December 31, how much will the company receive from the sale of the bonds? Group of answer choices Less than $500,000 because the 7% yield rate of interest was higher than the stated rate. The 6% bonds will not be sold at all. The company will be required to have the certificates reprinted bearing the new yield rate of 7%. Exactly $500,000 because the company would still pay interest at the stated rate. More than $500,000 because the 6% stated rate of interest was less than the yield rate.arrow_forwardAn MNC issues ten-year bonds denominated in 1,000,000 Mexican pesos at par. The bonds have a coupon rate of 13 percent. If the peso depreciates from $0.06 to $0.05 over the lifetime of the bonds, and if the MNC holds the bonds until maturity, what will the financing cost to the MNC be?arrow_forward
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