7. Drogo Inc. is trying to determine its cost of debt. The firm has a debt issue outstanding with 23 years to maturity that is quoted at 97 percent of face value. The issue makes semiannual payments and has an embedded cost of 5 percent annually. What is the companys cost of debt?

The cost of debt is the YTM of the companys bonds, so: PV = -$970 N= 46 PMT=$25 FV=$1,000 I/Y = 2.613% YTM = 2.613% x 2= 5.23%

8. Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.9 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,190,000 in annual sales, with costs of $815,000. If the tax rate is 35 percent, what is the OCF for this project?

Using the tax shield approach to calculating OCF (Remember the approach is irrelevant; the final answer will be the same no matter which of the four methods you use.), we get: OCF = (Sales Costs)(1 T) + T(Depreciation) OCF = ($2,190,000 815,000)(1 .35) + .35($2,900,000/3)

OCF = $1,232,083