Question
In: Accounting
1A. Buckeye Industries has a bond issue with a face value of $1000. The value of...
1A. Buckeye Industries has a bond issue with a face value of $1000. The value of Buckeye’s asset is $1200. In one year they will be worth either $800 or $1400. The going rate on T-bill is 4 percent. What is the value of debt, equity, and interest rate on debt?
1B. You have been hired to value a new 30-year convertible bond. The bond is 7% annual coupon bond with a face value of $1000. The conversion price is $65 and the stock currently sells for $50. What is the minimum value of the bond? Comparable non-convertible bonds are priced to yield 9%.
1C. 4. Consider a project that costs $5000 and has an
expected future cash flow of $1000 per year for 20 years. If we
wait one year, the cost will increase to $5500 and the expected
future cash flow will increase to $1200. If the required return is
13%, should we accept the project? If so, when should we
begin?
Solutions
Expert Solution
| 1A | Calculation of Value of Debt, Equity and interest rate on debt | |||
| Interest rate on Debt | = 4 % | |||
| Value of Debt | = $1000 | |||
| Value of Asset after 1 year | = $800 * 50 % + $1400 * 50% | |||
| = $1100 | ||||
| Value of Equity | = Value of Asset - Value of Debt | |||
| = $1100 - $1000 | ||||
| = $100 | ||||
| 1B | Calculation of Minimum Value of Bond | |||
| Conversion Ratio | = Par Value of Bond / Conversion price | |||
| = 1000 / 65 | ||||
| = 15.3846 | ||||
| Minimum Value of Bond | = Conversion Ratio * Stock Value | |||
| = 15.3846 * 50 | ||||
| = $769.23 | ||||
| 1C (a) | Calculation of NPV | |||
| Year | Cash Inflow | Disc Factor | PV ($) | |
| 1 | 1000 | 0.884956 | 884.9558 | |
| 2 | 1000 | 0.783147 | 783.1467 | |
| 3 | 1000 | 0.69305 | 693.0502 | |
| 4 | 1000 | 0.613319 | 613.3187 | |
| 5 | 1000 | 0.54276 | 542.7599 | |
| 6 | 1000 | 0.480319 | 480.3185 | |
| 7 | 1000 | 0.425061 | 425.0606 | |
| 8 | 1000 | 0.37616 | 376.1599 | |
| 9 | 1000 | 0.332885 | 332.8848 | |
| 10 | 1000 | 0.294588 | 294.5883 | |
| 11 | 1000 | 0.260698 | 260.6977 | |
| 12 | 1000 | 0.230706 | 230.7059 | |
| 13 | 1000 | 0.204165 | 204.1645 | |
| 14 | 1000 | 0.180677 | 180.6766 | |
| 15 | 1000 | 0.159891 | 159.8908 | |
| 16 | 1000 | 0.141496 | 141.4962 | |
| 17 | 1000 | 0.125218 | 125.2179 | |
| 18 | 1000 | 0.110812 | 110.8123 | |
| 19 | 1000 | 0.098064 | 98.06399 | |
| 20 | 1000 | 0.086782 | 86.78229 | |
| Total Cash Inflow | 7024.752 | |||
| Less: Cash outflow | 5000 | |||
| NPV | 2024.752 | |||
| (b) | Calculation of NPV If we wait for one year | |||
| Year | Cash Inflow | Disc Factor | PV ($) | |
| 1 | 1200 | 0.884956 | 1061.947 | |
| 2 | 1200 | 0.783147 | 939.776 | |
| 3 | 1200 | 0.69305 | 831.6602 | |
| 4 | 1200 | 0.613319 | 735.9825 | |
| 5 | 1200 | 0.54276 | 651.3119 | |
| 6 | 1200 | 0.480319 | 576.3822 | |
| 7 | 1200 | 0.425061 | 510.0728 | |
| 8 | 1200 | 0.37616 | 451.3918 | |
| 9 | 1200 | 0.332885 | 399.4618 | |
| 10 | 1200 | 0.294588 | 353.506 | |
| 11 | 1200 | 0.260698 | 312.8372 | |
| 12 | 1200 | 0.230706 | 276.8471 | |
| 13 | 1200 | 0.204165 | 244.9974 | |
| 14 | 1200 | 0.180677 | 216.8119 | |
| 15 | 1200 | 0.159891 | 191.8689 | |
| 16 | 1200 | 0.141496 | 169.7955 | |
| 17 | 1200 | 0.125218 | 150.2615 | |
| 18 | 1200 | 0.110812 | 132.9748 | |
| 19 | 1200 | 0.098064 | 117.6768 | |
| 20 | 1200 | 0.086782 | 104.1388 | |
| Total Cash Inflow | 8429.702 | |||
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