Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Project Funding Assignment It is January 1, 2005. Director of Special Projects Rakesh Parameshwar has a planned $20.5 million project, which will require the following

Project Funding Assignment

It is January 1, 2005. Director of Special Projects Rakesh Parameshwar has a planned $20.5 million project, which will require the following expected cash flows between 2005 and 2009:

Date

Cash Requirement ($ millions)

01-Jun-05

7.50

01-Jan-06

4.50

01-Jun-06

1.00

01-Jan-07

1.00

01-Jun-07

1.00

01-Jan-08

1.00

01-Jun-08

1.00

01-Jan-09

3.50

Rakesh turns to his Director of Financial Planning, Christine Reyling, and asks her to ensure that funding is available for the project. Christine is considering buying a portfolio of bonds, with cash flows from the bonds arranged to coincide with the needs of Rakeshs project. The following bonds are available, and can be purchased in any quantity:

Maturity

01-Jun-05

01-Jan-06

01-Jun-06

01-Jan-07

01-Jun-07

01-Jan-08

01-Jun-08

01-Jan-09

Coupon

7.00%

7.50%

6.75%

0.00%

10.00%

9.00%

10.25%

10.00%

Price

1.00

1.03

1.02

0.81

1.16

1.15

1.23

1.25

  1. What is the minimum cost portfolio of these bonds that will meet the projects requirements? Assume that any cash can be reinvested at an annual rate of 4%, and dont worry about discounting.
  2. What is the cost of capital over time for this project? In other words, if Rakesh decides he will need an additional dollar in June of 2007, what is the present value of that dollar? What is this present value for all relevant periods for the duration of the project?
  3. What is the implied yield for each of these periods? For example, if Rakesh needs an additional $1 million in June of 2007 and you conclude that the present value of this $1 million is $0.739 million, what is the implied rate of return on this $0.739 million that will be worth $1 million in June of 2007?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Financial Management

Authors: Jeff Madura

11th Edition

0538482966, 9780538482967

More Books

Students also viewed these Finance questions

Question

Identify and explain the various barriers to change.

Answered: 1 week ago

Question

How do emotions affect peoples relationship with money?

Answered: 1 week ago