Product code: Accounts-AW614
Complete the review problems listed below in either one word or excel document. Be sure to show your computations where applicable.
Consider the following three bonds with $1,000 face value:
Bond A: 10-year, 10 percent coupon bond
Bond B: 10-year, zero-coupon bond
Bond C: 20-year, 10 percent coupon bond
Compute the market values of each of the three bonds when the market interest rate varies from 0 to 14 percent. What is your interpretation of the decreasing relationship between bond market prices and interest rates?
Consider the following four bonds:
Coupon Issue Zero Coupon Perpetual Convertible
Maturity 5 Years 5 Years Infinity 5 Years
Coupon Rate 6 Percent Zero 6 Percent 5 Percent
Calculating the weighted average cost of capital.
Suppose that Tale Inc. has the following target capital structure: 50 percent stock, 40 percent debt and 10 percent preferred stock. Its cost of equity is estimated at 10 percent, that of debt 6 percent, and that of preferred stock 4.5 percent. The tax rate is 35 percent.
The cost of equity, the weighted average cost of capital, and financial leverage.
Albarval Co. expects its return on assets to be stable at 12 percent, assuming a target capital structure of 80 percent equity and 20 percent debt. Suppose that the firm’sborrowing rate is 8 percent, for a wide range of capital structures.
The analysis clearly shows that at no tax there is no benefit and it will increase cost of equity due to increase in financial risks but the cost of capital remain same in both case.
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