In: Finance
1. Suppose you have a 10% bond that pays annual coupon and with mature in 10 years. The face value is $1,000, and the yield to maturity on a similar bond is 8%. The bond is also convertible with a conversion price of 100. The stock is currently selling for $120. What is the minimum price of the bond?
2. You are considering a project that will require an initial outlay of $200,000. This project has an expected life of five years and will generate after-tax cash flows to the company as a whole of $60,000 at the end of each year over its five-year life. Thus, the free cash flows associated with this project look like this.
Given a required rate of return of 10% percent, calculate the IRR.
1.
Compute the minimum price of the bond, using the equation as shown below:
Minimum price = (Interest*PVIFA8%, 10 years) + (Face value*PVIF8%, 10 years)
= ($1,000*10%*6.7101) + ($1,000*0.4632)
= $1,134.21
Hence, the minimum price of the bond is $1,134.21.
Working note:
a.
Compute the PVIF at 8% and 10 years, using the equation as shown below:
PVIF = 1/ (1 + Rate)Number of periods
= 1/ (1 + 0.08)10
= 1/ 2.1589
= 0.4632
Hence, the PVIF at 8% and 10 years is 0.4632.
b.
Compute the PVIFA at 8% and 10 years, using the equation as shown below:
PVIFA = {1 – (1 + Rate)-Number of periods}/ Rate
= {1 – (1 + 0.08)-10}/ 8%
= (1 – 0.4632)/ 8%
= 6.7101
Hence, the PVIFA at 8% and 10 years is 6.7101.
2.
Compute the internal rate of return (IRR), using the MS-excel as shown below:
The result of the above excel table is as follows:
Hence, the IRR is 15%.