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A $1,000 par value bond was issued five years ago at a coupon rate of 8 percent. It currently has 7 years remaining to maturity. Interest rates on similar debt obligations are now 12 percent. Use Appendix B andAppendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Compute the current price of the bond using an assumption of semiannual payments. (Do not round intermediate calculations and round your answer to 2 decimal places.) Current bond price $ b. If Mr. Robinson initially bought the bond at par value, what is his percentage capital gain or loss? (Ignore any interest income received. Do not round intermediate calculations and input the amount as a positive percent rounded to 2 decimal places.) Percentage % c. Now assume Mrs. Pinson buys the bond at its current market value and holds it to maturity, what will be her percentage capital gain or loss? (Ignore any interest income received. Do not round intermediate calculations and input the amount as a positive percent rounded to 2 decimal places.) Percentage % d. Why is the percentage gain larger than the percentage loss when the same dollar amounts are involved in parts b and c? The percentage gain percentage loss beca larger. The percentage gain is larger than the percentage loss because Problem 16-5 Secured vs. unsecured debt [LO1] Match the yield to maturity in column 2 with the security provisions (or lack thereof) in column 1. Higher returns tend to go with greater risk. (1) Security Provision a. Debenture b. Secured debt c. Subordinated debenture Security Provision (2) Yield to Maturity a. 10.30 % b. 12.67 % c. 11.67 % Yield to Maturity a. Debenture b. Secured debt c. Subordinated debenture Problem 16-14 Effect of inflation on purchasing power of bond [LO2] Fourteen years ago, the Archer Corporation borrowed $7,050,000. Since then, cumulative inflation has been 51 percent (a compound rate of approximately 3 percent per year). a. When the firm repays the original $7,050,000 loan this year, what will be the effective purchasing power of the $7,050,000? (Hint: Divide the loan amount by one plus cumulative inflation.) (Do not round intermediate calculations and round your answer to the nearest whole dollar.) Effective purchasing power $ b. To maintain the original $7,050,000 purchasing power, how much should the lender be repaid? (Hint: Multiply the loan amount by one plus cumulative inflation.) (Do not round intermediate calculations and round your answer to the nearest whole dollar.) Loan repayment $ Problem 17-13 Procedures associated with a rights offering [LO3] Computer Graphics has announced a rights offering for its shareholders. Carol Stevens owns 1,200 shares of Computer Graphics stock. Five rights plus $52 cash are needed to buy one of the new shares. The stock is currently selling for $62 rights-on. a. What is the value of a right? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Value per right $ b-1. How many of the new shares could Carol buy if she exercised all her rights? (Do not round intermediate calculations. Round your answer down to the nearest whole number.) Number of shares b-2. How much cash would this require? (Round down the number of shares to the nearest whole number and round your answer to the nearest whole dollar.) Cash required $ Problem 17-20 Preferred stock dividends in arrears and valuing common stock [LO5] Enterprise Storage Company has 420,000 shares of cumulative preferred stock outstanding, which has a stated dividend of $5.75. It is six years in arrears in its dividend payments. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. How much in total dollars is the company behind in its payments? (Do not round intermediate calculations. Input your answer in dollars, not millions (e.g., $1,234,000).) Dividend in arrears $ b. The firm proposes to offer new common stock to the preferred stockholders to wipe out the deficit. The common stock will pay the following dividends over the next four years: D1 D2 D3 D4 $1.05 1.15 1.25 1.35 The company anticipates earnings per share after four years will be $4.07 with a P/E ratio of 14. The common stock will be valued as the present value of future dividends plus the present value of the future stock price after four years. The discount rate used by the investment banker is 11 percent. Compute the value of the common stock. (Do not round intermediate calculations and round your answer to 2 decimal places.) Common stock $ c. How many shares of common stock must be issued at the value computed in part b to eliminate the deficit (arrearage) computed in part a? (Do not round intermediate calculations and round your answer to the nearest whole share.) Number of shares of common stock Problem 17-12 Rights offering [LO3] Boles Bottling Co. has issued rights to its shareholders. The subscription price is $48 and four rights are needed along with the subscription price to buy one of the new shares. The stock is selling for $57 rightson. a. What would be the value of one right? (Do not round intermediate calculations and round your answer to 2 decimal places.) Value of one right $ b. If the stock goes ex-rights, what would the new stock price be? (Do not round intermediate calculations and round your answer to 2 decimal places.) New stock price $ Problem 17-21 Borrowing funds to purchase preferred stock [LO5] The treasurer of Kelly Bottling Company (a corporation) currently has $200,000 invested in preferred stock yielding 10 percent. He appreciates the tax advantages of preferred stock and is considering buying $200,000 more with borrowed funds. The cost of the borrowed funds is 12 percent. He suggests this proposal to his board of directors. They are somewhat concerned by the fact that the treasurer will be paying 2 percent more for funds than the company will be earning on the investment. Kelly Bottling is in a 30 percent tax bracket, with dividends taxed at 10 percent. a. Compute the amount of the aftertax income from the additional preferred stock if it is purchased. (Do not round intermediate calculations and round your answer to the nearest whole dollar.) Aftertax income $ b. Compute the aftertax borrowing cost to purchase the additional preferred stock. (Do not round intermediate calculations and round your answer to the nearest whole dollar.) Aftertax borrowing cost $ c. Should the treasurer proceed with his proposal? No Yes d. If market interest rates and dividend yields increase six months after a purchase decision is made, will the impact of those increases be favorable or unfavorable for the firm? Favorabl e Unfavorable
