1. Your company needs to raise $50 million, and you want to issue 10-year annual coupon bonds to raise this capital. Suppose the market requires the return of your company's bonds to be 6%, and you decided toissue them at par,

a. How many bonds would you need to issue?

b. What will be the total expense to your company at the time when the bonds mature in year 10?

c. Suppose your company is in the 38% tax bracket. What is your company's net after-tax interest cost associated with the bond issue at the time when the bonds mature in year 10?

2.Lothar Drake wishes to estimate the value of an asset expected to provide cash inflows of $4,000 at the end of years 1 and 2, $5,000 at the end of years 3 and 4, and $4,500 at the end of year 5. His research indicates that he must earn 4% on low-risk assets, 6% on average-risk assets, and 10% on high-risk assets.

a. Determine what is the most Lothar should pay for the asset if it is classified as

(1) low-risk, (2) average-risk, and (3) high-risk.

b. Suppose that Lothar is unable to assess the risk of the asset and wants to be certain that he is making a good decision. Based on your findings in parta,what is the most he should pay? Why?

c. All else being the same, what effect does increasing risk have on the value of an asset? Explain in light of your findings in parta.