A company has one- and two-year bonds outstanding, each providing a coupon of 6% per year payable annually. The yields on the bonds (expressed with continuous compounding) are 3.0% and 3.6%, respectively. Risk-free rates are 2.5% for all maturities. The recovery rate is 35%. Defaults can take place half way through each year. Estimate the risk-neutral default probability each year.

On July 1, Year 1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $8,900,000 of 8-year, 9% bonds at a market (effective) interest rate of 11%, receiving cash of $7,968,868. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Required:

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1. For a compound transaction, if an amount box does not require an entry, leave it blank.

2. Journalize the entries to record the following: For a compound transaction, if an amount box does not require an entry, leave it blank. Round your answer to the nearest dollar.

a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond discount, using the straight-line method.

b. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the straight-line method. Round your answer to the nearest dollar.

3. Determine the total interest expense for Year 1. Round to the nearest dollar.
$

4. Will the bond proceeds always be less than the face amount of the bonds when the contract rate is less than the market rate of interest?

5. Compute the price of $7,968,868 received for the bonds by using Table 1, Table 2, Table 3 and Table 4. (Round to the nearest dollar.) Your total may vary slightly from the price given due to rounding differences.

QUESTION 4 Ann got a 30 year FRM with annual payments equal to $12,000 per year. After 2 years of payments Ann will refinance the balance into a 28 year FRM with annual payments equal to $11,500 per year. Refinancing will cost Ann $2,500. Ann will prepay the new loan 3 years after refinancing. She will save $4,000 on her loan balance when she prepays. What is Ann’s annualized IRR from refinancing?

QUESTION 5 Lucy bought a house for $100,000. Lucy’s annual cost of ownership net of tax savings is exactly equal to the annual rent she would have paid to live in the same house. The house price grows 4.5% annually (compounded annually). Suppose buying costs are 5% (of the purchase price of the house) and selling costs are 8% (of the selling price of the house). Lucy will sell the house in one year. What is Lucy’s annualized IRR? (hint: it will be negative)

Scott Company sells merchandise with a one-year warranty. Sales consisted of 25,000 units in Year 1 and 20,000 units in Year 2. It is estimated that warranty repairs will average $100 per unit sold, and 30% of repairs will be made in Year 1 and 70% in Year 2 for the Year 1 sales. Similarly, 40% of repairs will be made in Year 2 and 60% in Year 3 for Year 2 sales. In the Year 2 income statement, how much of the warranty expense shown will be due to year 2 sales? Double-click on the box below to edit your answer choices.

A.$2,000,000 B.$2,600,000 C.$1,400,000 D.$800,000

The Dunder-Mifflin Paper Company purchased a timber site for $2,000,000 on August 1. The company expects to cut trees for the next 20 years and ancticipates that a total of 550,000 tons of timber will be provided. The timber site has an estimated residual value of $100,000. During the first year, the company extracted 10,000 tons of timber, and in the second year the company extracted 20,000 tons of timber. The depletion expense for year 1 is Double-click on the box below to edit your answer choices.

A.$34,545 B.$36,364 C.72,726 D.69,080

Westmont Company's book value of its fixed assets are $800,000 at the beginning of the year, and $600,000 at the end of the year. What is the fixed asset turnover ratio for Westmont if the company had sales of $2,100,000 and operating expenses of $1,600,000 for the current year. Double-click on the box below to edit your answer choices.

A.0.2857 B.2.6250 C.3.0000 D.0.7143

Your first job out of college will pay you $61,000 in year 1 (exactly one year from today), growing at a rate of 3.0% per year thereafter. You will also receive a one time bonus of $39,000 at the same time as your first salary. You plan to retire in 39 years (you'll receive 39 years of salary). If the applicable discount rate is 6%, what is the present value of these future earnings today? Round to the nearest cent.

Cincinnati Company has decided to put $30,000 every year for next 3 years, $25000 for year 4, 5 and 6, and $40000 for year 7, 8, 9 and 10 in a pension fund. The fund will earn interest at the rate of 6% per year. Illustrate the timeline for the project and volume of money available in pension fund after 10 years.

A 59 year-old calendar year individual taxpayer purchased an annuity from an insurance company for $100,000 in 2019. The terms of the annuity were that the company would pay him $5,000 a year to T for the rest of T’s life. How much income will he include in his personal income tax return as a result of receiving the $5,000 payment

in 2020?   _____________

In 2050? ______________

Hampton Industries had $47,000 in cash at year-end 2015 and $10,000 in cash at year-end 2016. The firm invested in property, plant, and equipment totaling $270,000. Cash flow from financing activities totaled +$150,000. Round your answers to the nearest dollar, if necessary.

1. What was the cash flow from operating activities? Enter cash outflows with a minus sign.
   $   
   
2. If accruals increased by $15,000, receivables and inventories increased by $145,000, and depreciation and amortization totaled $27,000, what was the firm's net income?

$

[Q14-17] Your firm has a free cash flow of $300 at year 1, $360 at year 2, and $864 at year 3. After three years, the firm will cease to exist. As of today (i.e. at year 0), the firm is partially financed with a 1-year maturity debt, whose face value is $660 and interest rate is 10%. After the debt matures at year 1, the firm will not issue any more debt and will remain unlevered. Assume that the firm’s unlevered cost of capital is 20%, and the firm’s cost of debt is identical to the interest rate on the debt (i.e. 10%). The corporate tax rate is 40%.

1. What is the firm’s enterprise value if the firm were unlevered?

2. What is the discount rate for the interest tax shield?

3. What is the present value of the interest tax shield?

4. What is the firm’s enterprise value?