Question
3)Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had a 30-year life when issued and the annual interest payment was then 14 percent. This return was in line with the required returns by bondholders at that point as described below:
Real rate of return3% Inflation premium6 Risk premium5 Total return14%
Assume that five years later the inflation premium is only 2 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 25 years remaining until maturity.
Compute the new price of the bond. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.)
New price of the bond$
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Question
4)Katie Pairy Fruits Inc. has a $3,500, 14-year bond outstanding with a nominal yield of 16 percent (coupon equals 16% × $3,500 = $560 per year). Assume that the current market-required interest rate on similar bonds is now only 12 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a.Compute the current price of the bond. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) Current price of the bond$ b.Find the present value of 4 percent × $3,500 (or $140) for 14 years at 12 percent. The $140 is assumed to be an annual payment. Add this value to $3,500. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) Present value$
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Question
5)Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issued by the Leisure Time Corporation. The $1,000 par value bond pays 4 percent annual interest and has 18 years remaining to maturity. The current yield to maturity on similar bonds is 13 percent.
a.What is the current price of the bonds? Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.)
Current price of the bond$
b.By what percent will the price of the bonds increase between now and maturity? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Price increases by%
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Question
13)The Goodsmith Charitable Foundation, which is tax-exempt, issued debt last year at 12 percent to help finance a new playground facility in Los Angeles. This year the cost of debt is 15 percent higher; that is, firms that paid 14 percent for debt last year will be paying 16.10 percent this year.
a.If the Goodsmith Charitable Foundation borrowed money this year, what would the aftertax cost of debt be, based on their cost last year and the 15 percent increase? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Aftertax cost of debt % b.If the receipts of the foundation were found to be taxable by the IRS (at a rate of 40 percent because of involvement in political activities), what would the aftertax cost of debt be? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Aftertax cost of debt%
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