Solution method uses PV function/formula delines: <-- To view guidelines, move mouse pointer over cell with red triangle. Red triangle identifies a cell comment. blem: Current cost of a bond: You know that the after-tax cost of debt capital for Bubbles Champagne Company is 7 percent. If the firm has only one issue of five-year bonds outstanding, what is the current price of the bonds if the coupon rate on those bonds is 10 percent? Assume the bonds make semiannual coupon payments and the marginal tax rate is 30 percent. nown: Before tax cost of debt and current price of bond. umption(s) Par or face value of bond is $1,000 After tax cost of debt is an annual rate with semiannual compounding en information/inputs/arguments: After tax cost of debt Maturity date, future years Annual coupon rate on bonds Times per year that interest paid ****** ****** Marginal tax rate Values Comments Enter percent as XX.XX% or decimal, .XXXX Enter amount as positive value Enter percent as XX.XX% or decimal, .XXXX Compounded semiannually. Enter percent as XX.XX% or decimal, .XXXX

Solution method uses PV function/formula delines: <-- To view guidelines, move mouse pointer over cell with red triangle. Red triangle identifies a cell comment. blem: Current cost of a bond: You know that the after-tax cost of debt capital for Bubbles Champagne Company is 7 percent. If the firm has only one issue of five-year bonds outstanding, what is the current price of the bonds if the coupon rate on those bonds is 10 percent? Assume the bonds make semiannual coupon payments and the marginal tax rate is 30 percent. nown: Before tax cost of debt and current price of bond. umption(s) Par or face value of bond is $1,000 After tax cost of debt is an annual rate with semiannual compounding en information/inputs/arguments: After tax cost of debt Maturity date, future years Annual coupon rate on bonds Times per year that interest paid Marginal tax rate Values Comments Enter percent as XX.XX% or decimal, .XXXX Enter amount as positive value Enter percent as XX.XX% or decimal, .XXXX Compounded semiannually. Enter percent as XX.XX% or decimal, .XXXX

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 14P

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1. Problem 10.01 (After-Tax Cost of Debt) eBook The Holmes Company's currently outstanding bonds have an 8% coupon and a 14% yield to maturity. Holmes believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 25%, what is Holmes' after-tax cost of debt? Round your answer to two decimal places. Grade It Now Save & Continue Continue without saving
Q1: Suppose your company needs to raise $10 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 9 percent, and you’re evaluating two issue alternatives, a 9 percent annual coupon bond and a zero coupon bond. Your company's tax rate is 35 percent. a) How many of the coupon bonds would you need to issue to raise the $10 million? How many of the zero coupon bonds would you need to issue? b) In 30 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zero coupon bonds? c) Based on your answers in (a) and (b), why would you ever want to issue the zeroes? To answer, calculate the firm's after tax cash outflows for the first year under the two different scenarios.
ces Suppose your company needs to raise $69 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 4.2 percent, and you're evaluating two issue alternatives: a semiannual coupon bond with a coupon rate of 4.2 percent and a zero coupon bond. The tax rate is 25 percent. Both bonds will have a par value of $2,000. a-1. How many of the coupon bonds would you need to issue to raise the $69 million? a-2. How many of the zeroes would you need to issue? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b-1. In 30 years, what will your company's repayment be if you issue the coupon bonds? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number e.g., 1,234,567.) b-2. What if you issue the zeroes? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)…
ces Suppose your company needs to raise $40.3 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 5.3 percent, and you're evaluating two issue alternatives: a semiannual coupon bond with a coupon rate of 5.3 percent and a zero coupon bond. The tax rate is 23 percent. Both bonds will have a par value of $1,000. a. How many of the coupon bonds would you need to issue to raise the $40.3 million? How many of the zeroes would you need to issue? Note: Do not round Intermediate calculations. Round your coupon bond answer to the nearest whole number, e.g., 32 and your zero coupon bond answer to 2 decimals, e.g., 32.16. b. In 30 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zeroes? Note: Do not round Intermediate calculations and enter your answers in dollars, not millions, rounded to the nearest whole number, e.g., 1,234,567. c. Assume that the IRS amortization rules apply for…
5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. The Holmes Company's currently outstanding bonds have a 10% coupon and a 12% yield to maturity. Holmes believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 25%, what is Holmes' after-tax cost of debt? Round your answer to two decimal places.
An insurance company must make payments to a customer of $10 million in one year and $4 million in five years. The yield curve is flat at 10%.a. If it wants to fully fund and immunize its obligation to this customer with a single issue of a zero-coupon bond, what maturity bond must it purchase?b. What must be the face value and market value of that zero-coupon bond?
Question 2 Assume the yield curve is flat shown as following table. A cash and $duration-neutral butterfly is to be constructed by selling one thousand 7-year coupon paying bonds and purchasing qs and ql coupon paying bonds with maturities 3 and 15 years respectively. More information on the bonds to be used in the strategy is given Note that we are assuming all bonds pay interest semi-annually. (a) Explain how to interpret the modified duration of -8.86 corresponding to the 15-year maturity bond. (b) Write down the system of equations that needs to be solved in order to find qs and ql and verify that the solution to this system is qs = 679.32 and ql =366.23. (c) Find the profit from this strategy if yield curve moves: (i) up to 8% pa and (ii) down to 5% pa. (d) Explain why in practice it may be difficult to profit from the cash and $duration neutral butterfly. (e) Explain the major differences between the 50-50 butterfly strategy and the cash and $duration neutral butterfly.
Question 6 Suppose that the yield to maturity of the 4% coupon, 35-year maturity bond falls to 6% by the end of the first year and that the investor sells the bond after the first year. If the investor's federal plus state tax rate on interest income is 35% and the combined tax rate on capital gains is 25%, what is the investor's after-tax rate of return?
4. Problem 10.01 (After-Tax Cost of Debt) eBook The Holmes Company's currently outstanding bonds have an 8% coupon and a 10% yield to maturity. Holmes believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 40%, what is Holmes' after-tax cost of debt? Round your answer to two decimal places. %
Suppose we have a bond issue currently outstanding that has 25 years left to maturity. The coupon rate is 9% and coupons are paid semiannually. The bond is currently selling for $908.72. If the firm's marginal tax rate is 20%. What's the firm's after-tax cost of debt? O 8.0% O 9.0% O 10.0% O 11.0%
= = Problem 2 Currently the yield curve observed in the market is as follows: yı 6%, Y2 = 7%, and yз 9%. You are choosing between a two-year and three-year maturity bonds all paying annual coupons of 8%, once a year. You strongly believe that at the end of year 1 the yield curve will become flat at 9%. (1) Which bond (and why) should you buy if you plan to close out your position in one year right after receiving the coupon payment? (2) Suppose that you can either invest in a two-year bond described above, or invest in a 1-year bank deposit with an annual interest rate of 6%. As in (a), your investment horizon is 1 year. Which option would you choose and why?
26. Suppose that a long-term coupon bond with a coupon rate of 5% is purchased today at its face value of $1,000 and resold a year later for a price of $950. The holding period return for the bond is equal to: a. 0% b. 2% c. 3% d. 5% 27. A decrease in the market interest rate will cause the value of a bank's portfolio of fixed-payment loans to: a. rise b. fall c. remain unchanged d. rise or fall, depending on the maturity of the bonds 28. A risk-free consol provides an annual payment of $50. If the market interest rate is 5%, the price of the consol will be: a. $55 b. $500 c. $1,000 d. $1,050