Ramstucky Corp bonds just paid their annual coupon of 4%. They mature in 6 years. The required rate of return on the bonds is 5%. The call price of the bonds is 102, but they are not callable until after the second coupon payment.

1. What is the price of the bonds as a percentage of par?
2. What is the current yield?
3. What is the yield to first call?
4. If, immediately after the second coupon payment, the yield to maturity is 4.5% and you sell the bond at that time, what rate of return will you have received over the two years?

Briefly explain the concept of operating leverage. If a company takes actions that reduce its operating leverage, how is it going to affect the equity beta of the company? Why?

Magic Production Company (MPC) is considering a recapitalisation plan that would convert MPC from its current all-equity capital structure to one including some financial leverage. MPC now has 6 million ordinary shares outstanding, which are selling for $50.00 each. Currently, MPC shareholders have a required return of 15%. The expected earnings before interest and taxes (EBIT) of MPC is $45,000,000 per year for the foreseeable future.

The recapitalisation proposal is to issue $100,000,000 worth of long-term debt at an interest rate of 7.5 per cent and use the proceeds to repurchase as many shares as possible at a price of $50.00 per share. Assume there are no market frictions such as corporate or personal income taxes.

a. Calculate the number of shares outstanding and the debt-to-equity ratio for MPC if the proposed recapitalisation is adopted.

b. Calculate the expected earnings per share (EPS) and the expected return on equity (ROE) for MPC shareholders under the proposed mixed debt/equity capital structure. How does it compare to the EPS and ROE under the current capital structure?

c. Calculate the break-even level of EBIT where earnings per share for MPC shareholders are the same under the current and proposed capital structures.

For the next question assume Magic Production Company (MPC) is subject to a 40% corporate income tax rate.

How does financial leverage increase the value of MPC in the presence of corporate income taxes? Explain.

Show all workings step by step calculations

I'm having trouble putting in words, basically I would like to explain for each bond par/discount/premium, the relationship between coupon rate, current yield and yield-to-maturity. Basically explain the relationship

Discount Bonds (Price < Par): YTM > Current Yield > Coupon Rate

but in the least math terms as possible. Any tips? thanks!

The following information is taken from the records of XYZ Company: Cash $10,000 Accounts receivables 30,000 Inventory 80,000 Prepaid insurance 6,000 Fixed assets 200,000 Accounts payable 30,000 Notes payable (due in 10 months) 25,000 Wages payable 5,000 Long term liabilities 70,000 Owners’ equity 196,000 The company had sales of $150,000, cost of good sold of 60,000 and a net income of 25,000

MCQ

8-The company’s assets turnover is: A) 1 times B) 0.75 times C) 0.5 times

9. The company’s inventory turnover is: A) 1 times B) 0.75 times C) 0.5 times

10. The company’s Days inventory on hand is: A) 450 days B) 477 days C) 487 days

11. The company’s receivable turnover is: A) 5 times B) 10 times C) 15 times

12. The company’s average collection period is: A) 75 days B) 74 days C) 73 days

How do liabilities and stockholders’ equity differ? How are they similar? B. Explain how retained earnings and dividends are related? How do cash dividends affect the financial statements? C. How a company can reduce its break-even point?

The life of the project is 5 years.  A feasibility study has been undertaken at a cost of $2 million. The study concluded that at the end of the project the cost of restoring the environment of the mine would be approximately $ 1.2 million.  The project would require capital equipment of $8 million. The shipping and installation costs for this equipment are around $40,000. This equipment will be depreciated on a straight‐line basis over the life of the project to a book value of zero.  At the end of the project, the equipment will be salvaged for $30000 but half of this amount will be used up for cleaning up costs and strengthening the foundations of the floor directly below the equipment when the equipment is removed.  The project will result in additional revenue of $7 million per year and will incur additional costs (excluding depreciation) of $2.5 million per year.  If this project is not undertaken then the area could have been leased out to another company for an annual rent of $ 750,000.  The corporate tax rate is 30% and the required rate of return for projects of this risk level is 9%. Required: (a) Determine the cash flows associated with this project . (b) Compute the NPV and IRR for this project. ‘(c) Advise if you would recommend the project, with reasons.

What are the key characteristics of the following market anomalies: (include a theoretical justification of each)

- Size

- Value

- Low Beta

​Long-term investment​ decision, payback method Personal Finance Problem   Bill Williams has the opportunity to invest in project A that costs

$ 6 comma 600$6,600

today and promises to pay

$ 2 comma 200$2,200​,

$ 2 comma 500$2,500​,

$ 2 comma 500$2,500​,

$ 2 comma 000$2,000

and

$ 1 comma 700$1,700

over the next 5 years. ​ Or, Bill can invest

$ 6 comma 600$6,600

in project B that promises to pay

$ 1 comma 300$1,300​,

$ 1 comma 300$1,300​,

$ 1 comma 300$1,300​,

$ 3 comma 400$3,400

and

$ 4 comma 100$4,100

over the next 5 years.  

​(​Hint:

For mixed stream cash​ inflows, calculate cumulative cash inflows on a​ year-to-year basis until the initial investment is

recovered.​)

a.  How long will it take for Bill to recoup his initial investment in project​ A?

b.  How long will it take for Bill to recoup his initial investment in project​ B?

c.  Using the payback​ period, which project should Bill​ choose?

d.  Do you see any problems with his​ choice?

Assume the firm has a tax rate of 21 percent.

c-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued.

c-2. Calculate the percentage changes in ROE when the economy expands or enters a recession.

c-3. Calculate the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization.

c-4. Given the recapitalization, calculate the percentage changes in ROE when the economy expands or enters a recession.

A U.S.-based importer, Zarb, invests $1000 in a risk-free 180-day Switzerland bond with a 4% annual Swiss francs return. He plans to lock in the dollar return by selling the Swiss francs in the forward market. Assume that the spot exchange rate is 1.66 Swiss francs per dollar and the 180-day forward exchange rate is 0.6 dollar per Swiss francs. What's the expected annual dollar return?

Bluegrass Mint Company has a debt-equity ratio of .35. The required return on the company’s unlevered equity is 12.7 percent and the pretax cost of the firm’s debt is 6.5 percent. Sales revenue for the company is expected to remain stable indefinitely at last year’s level of $19,600,000. Variable costs amount to 65 percent of sales. The tax rate is 25 percent and the company distributes all its earnings as dividends at the end of each year.

a. If the company were financed entirely by equity, how much would it be worth? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)

b. What is the required return on the firm’s levered equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

c-1. Use the weighted average cost of capital method to calculate the value of the company. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)

c-2. What is the value of the company’s equity? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)

c-3. What is the value of the company’s debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)

d. Use the flow to equity method to calculate the value of the company’s equity. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)

A three-year old 10-year 8% semi-annual coupon bond is selling at $1,200 today. If the yield increases by 25 basis points, how much of the price change is due to

convexity of the bond? (Face Value = $1,000)