Finance Bond And Valuation Fundamentals Homework Help
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1-Bond interest payments before and after taxes
Charter Corp. has issued 2,500 debentures with a total principal value of $2,500,000. The bonds have a coupon interest rate of 7%.
a. What dollar amount of interest per bond can an investor expect to receive each year from Charter?
b. What is Charter s total interest expense per year associated with this bond issue?
c. Assuming that Charter is in a 35% corporate tax bracket, what is the company s net after-tax interest cost associated with this bond issue?
2- Valuation Fundamentals
Imagine that you are trying to evaluate the economics of purchasing an automobile. You expect the car to provide annual after-tax cash benefits of $1,200 at the end of each year and assume that you can sell the car for after tax proceeds of $5,000 at the end of the planned 5-year ownership period. All funds for purchasing the car will be drawn from your savings, which are currently earning 6% after taxes.
A. Identify the cash flows, their timing, and the required return applicable to valuing the car.
B. What is the maximum price you would be willing to pay to acquire the car? Explain.
3- Midland Utilities has outstanding a bond issue that will mature to its $1,000 par value in 12 years. The bond has a coupon interest rate of 11% and pays interest annually.
a. Find the value of the bond if the required return is
(2) 15%, and
b. Plot your findings in part a on a set of required return (x axis) market value of bond (y axis) axes.
c. Use your findings in parts a and b to discuss the relationship between the coupon interest rate on a bond and the required return and the market value of the bond relative to its par value.
d. What two possible reasons could cause the required return to differ from the coupon interest rate?
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4-The Salem Company bond currently sells for $955, has a 12% coupon interest rate and a $1,000 par value, pays interest annually, and has 15 years to maturity.
a. Calculate the yield to maturity(YTM) on this bond.
b. Explain the relationship that exists between the coupon interest rate and yield to maturity and the par value and market value of a bond.
5.Consider the following information. How many shares do you hold today if you bought 1,000 shares of this stock at the beginning of 1985?
1986—10 percent stock dividend
1987—10 percent stock dividend
1988—25 percent stock dividend
1989—100 percent stock dividend
1994—2-for-1 stock split
2007—100 percent stock dividend
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