15. Question: : (TCO D) On January 1, Martinez Inc. issued $3,000,000, 11% bonds for $3,195,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Martinez uses the effective-interest method of amortizing bond premium.
P = F*r*[1 -(1+i)^-n]/i + C*(1+i)^-n, where F = 1000. Since we are not given the maturity value, we can assume that it is the same as the par value. So, C = 1000. r = .08 i = .09 n = 12 The bond price is 1000*.08 * (1 - 1.09^-12)/.09 + 1000*1.09^-12 = $928.39 5-2 YTM for Annual Payments Wilson Wonder’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850.
MARRIOTT CORPORATION: THE COST OF CAPITAL Lodging Division Cost of Debt From Table A, * Fraction of Debt at Floating: 50% * Fraction of Debt at Fixed: 50% Using credit risk premium to calculate cost of debt, the equation is as follows: Cost of Debt = Low risk rate+Risk premium Floating Rate -- Assume the interest rate of floating rate debt changes every year so we use 1-year rate U.S. Government interest rate, which is 6.90% (from Table B). Therefore, the cost of floating rate debt equals 6.9% plus the 1.1% risk premium, which totaled to 8%. Fixed Rate -- As lodging assets have long useful lives, we use the long-term debt rate, i.e. 30-year U.S. Government interest rate, which is 8.95% (from Table B). Therefore, the cost of fixed rate debt equals 8.95% plus 1.1% risk premium, which totaled to 10.5% Cost of Debt = (0.5 x 0.08) + (0.5 x 0.105) = 0.095 = 9.25% [since floating rate and fixed rate debt both weigh 50%, we use the weighted average approach to calculate the total cost of debt rate] Based on historical data analysis below, we get an average income tax rate of 42%.
BRIEF EXERCISE 19-8 Income before income taxes $195,000 Income tax expense Current $48,000 Deferred 30,000 78,000 Net income $117,000 BRIEF EXERCISE 19-10 Year | Future taxable amount | X | Tax Rate | = | Deferred tax liability | 2013 | $ 42,000 | 34% | $ 14,280 | 2014 | 244,000 | 34% | 82,960 | 2015 | 294,000 | 40% | 117,600 | | | | $214,840 | BRIEF EXERCISE 19-14 Income Tax Refund Receivable ($350,000 X. 40) 140,000 Benefit Due to Loss Carryback 140,000 Deferred Tax Asset ($500,000 – $350,000) X .40 60,000 Benefit Due to Loss Carryforward 60,000 Benefit Due to Loss Carryforward 60,000 Allowance to Reduce Deferred
Question 23 Which of the following statements is CORRECT? Question 24 Which of the following bonds has the greatest interest rate price risk? Question 25 A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT? Question 26 Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as
Increase 2. Bond computations: Straight-line amortization Southlake Corporation issued $900,000 of 8% bonds on March 1, 20X1. The bonds pay interest on March 1 and September 1 and mature in 10 years. Assume the independent cases that follow. • Case A—The bonds are issued at 100.
The result is this one: 0.082 (1-0.3879) = 0.05019. The other after tax costs are 0.050498 and 0.05738, respectively for $133 million bond and $100million bond. From the information taken above we conclude that the Cost of total debt = (0.05738 + 0.050498 + 0.05019) / 3 = 0.0526 (5.26%) Cost of the equity, we calculated on question nr 3, and it is 17.6525 %. To sum up, the cost of the capital is nothing more than the sum of the cost of equity and cost of debt, the calculation is this: Cost of capital = 17.6525 % + 5.26% = 22.91 % QUESTION 5: If Wonder Bar uses book value rather than market value to determine its capital structure, what is the impact of the cost of capital on its budgeting decisions? Market value is simply the amount of money that people are willing to pay for a stock.
In total it will be $74,295; since the investors paid $80,000 the yield rate is less than 8%. As for the correctness of the $748 first year bond discount amortization, the calculation follows: Since the bond proceeds were $80,000 and the true yield is 7.23% per year. 7.23% came from the interest table that I have. Then for Year 1 net interest should be $80,000*.0723 =$5784. But the stated interest payment is $5,000, thus the $784 interest expense is amortization of the bond discount.
A firm's current balance sheet is as follows Assets $100 Debt $10 Equity $90 A) What is the firm's weighted-average cost of capital at various combinations of debt and equity, given the following information? 1. Debt/Assets After-Tax Cost of Debt Cost of Equity Cost of Capital 0% (.0)(.08) (1.0)(12) .120 10 (.1)(.08) (.9)(.12) .116 20 (.2)(.08) (.8)(.12) .112 30 (.3)(.08) (.7)(.13) .115 40 (.4)(.09) (.6)(.14) .120 50 (.5)(.10) (.5)(.15) .125 60 (.6)(.12) (.4)(.16) .136 B) Construct a pro forma balance sheet that indicates the firm's optimal capital structure. Compare this balance sheet with the firm's current balance sheet. What course of action should the firm take?
Second, Cost of Equity should be found. Cost of Equity is different for different countries, but it uses US risk free rate and risk premium rate because all debt is financed in USD. Risk free rate is 4.5%, which is 10 year US Treasury Bond, US risk premium is 7%. Using the equation: Cost of Equity =risk free rate +leveraged beta* US risk Premium, we have the cost of equity of Red Oak is 0.07393, the cost of equity of Caracoles is 0.1041. Third, Cost of Debt=Risk free rate+ Default Spread.