• +44-190-022-0819 +44-190-022-0819
  • +1-248-268-9041 +1-248-268-9041
  • +61288800241 +61288800241


Search your solution from list of 1000+ questions


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.

Bond Valuation.

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?

Bond Valuation.

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



  1. If the market yield is 7 percent, what are the values of the three first bonds (assume a face value of $1,000)?
  2. Why are the values of the bonds lower than their face value?
  3. Why is the coupon rate for the convertible bond lower than that for the non-convertible, coupon issue?
  4. Given that the convertible bond is trading at $1,040, what is the value of the option to convert?
  5. Suppose that the market yield rises to 7.5 percent. What are the bond values at that yield?  Explain why the change in the value of the bonds is different.



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.


  1. What is Tale’s cost of capital?
  2. Should Tale use more preferred stock financing than debt financing since it is cheaper?



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.


  1. Suppose that Albarval does not pay any tax. What’s Albarvals’ cost of equity?What would Albarval’s cost of equity be if the target capital structure is 50 percent equity, 50 percent debt?  Show that under both Structures the firm’s weighted average capital cost is the same and that it is equal to 12 percent.
  2. Suppose now that the firm’s tax rate is 40 percent.  What is the cost of equity and the WACC under the two capital structures?  Why are the cost of equity and the WACC different under the two capital structures?




Download Questions

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.

Related Questions in (Accounting)


Solution: The Journal of Helene Berr and Rue Ordener, Rue Labat 2 evidences that prove the difficulty and destructiveness that the people had to face in those four years. As mentioned by Berr (2009, p.23), in h ...


Solution: Employee communication highlights the sharing of ideas and information. In this competitive business world, information exchange is essential among employees to develop team performance effectively. m ...


Solution: As per Section 1 of the Thirteenth year plan describes about China’s two key objectives that will be accomplished if the National People’s Congress or the standing committee of this party passes t ...


Solution: (Feldman 2005) reference information extraction to be one of the weightiest pre-processing method that escalates the text mining potential significantly. Pre-processing is an essential part in informa ...


Solution: The pro forma income statement represents a trending statement that includes the probable net income value for the company considering the current growth and decline rates valid throughout the period ...


Solution: Mode is defined as the value which occurs more frequently in the data set. The mode for non-business is 82 while for business is only 59. P value can be calculated from z table . As per z table p valu ...


Solution: ABC assumes that there are different activities involved in different processes that cause costs andthe product, services, and customers are reasons for those activities. The UK customer segment is br ...


Solution: Residual earnings valuation method is used to calculate the intrinsic value of the stock based on the expected residual income of the company in the coming years. The residual income is discounted bac ...