Question

Lupe has 5% bonds outstanding that mature in six years the bonds pay interest semiannually and have a face value of $1000 currently the barns are selling for $976 the current tax rate is 21% what is the firms pretax cost of debt?

A 4.97%

B 5.18%

C 5.47%

D 6.31%

E 5.80%

General Disco has 8.2% semi annual coupon bonds outstanding that mature in 11 years. The yield to maturity is 7.4% what price are these bonds selling for?

A 1059.50

B 1669.35

C 1390.66

D 1581.44

E 1058.81

A 10 year project is expected to generate annual revenues of $121,800 variable costs are $62,600 fixed costs are $15,000 the annual depreciation is $16,500 and the tax rate is 22% what is the annual operating cash flow?

A $19,551

B $33,662

C $36,052

D $36,706

E $38,106

Answer 1

Answer to Question 1:
Face Value = $1,000
Current Price = $976

Annual Coupon Rate = 5%
Semiannual Coupon Rate = 2.50%
Semiannual Coupon = 2.50% * $1,000
Semiannual Coupon = $25

Time to Maturity = 6 years
Semiannual Period to Maturity = 12

Let Semiannual YTM be i%

$976 = $25 * PVIFA(i%, 12) + $1,000 * PVIF(i%, 12)

Using financial calculator:
N = 12
PV = -976
PMT = 25
FV = 1000

I = 2.737%

Semiannual YTM = 2.737%
Annual YTM = 2 * 2.737%
Annual YTM = 5.47%

Pre Tax Cost of Debt = 5.47%

Option C is Correct.

Answer to Question 2:
Face Value of Bond $1,000

Annual Coupon Rate = 8.20%
Semiannual Coupon Rate = 4.10%
Semiannual Coupon = 4.10% * $1,000
Semiannual Coupon = $41

Time to Maturity = 11 years
Semiannual Period = 22

Annual YTM = 7.40%
Semiannual YTM = 3.70%

Market Price of Bond = $41 * PVIFA(3.70%, 22) + $1,000 * PVIF(3.70%, 22)
Market Price of Bond = $41 * (1 - (1/1.037)^22) / 0.037 + $1,000 * (1/1.037)^22
Market Price of Bond = $41 * 14.87453 + $1,000 * 0.44964
Market Price of Bond = $1,059.50

Option A is Correct.

Answer to Question 3:
Operating Income = Sales Revenue – Variable Costs – Fixed Costs – Depreciation
Operating Income = $121,800 - $62,600 - $15,000 - $16,500
Operating Income = $27,700

Net Income = Operating Income * (1 – Tax Rate)
Net Income = $27,700 * (1 – 0.22)
Net Income = $21,606

Annual Operating Cash Flow = Net Income + Depreciation
Annual Operating Cash Flow = $21,606 + $16,500
Annual Operating Cash Flow = $38,106

Option E is Correct.