Instructions
| Instructions | |
| NAME: | |
| To complete the homework assignments in the templates provided: | |
| 1. | The question is provided for each problem. You may need to refer to your textbook for additional information in a few cases. |
| 2. | You will enter the required information into the shaded cells. |
| 3. | The cells are coded: |
| a) T requires a text answer. Essay questions require references; use the textbook. | |
| b) C requires a calculation, using Excel formulas or functions. You cannot perform the operation on a calculator and then type the answer in the cell. You will enter the calculation in the cell, and only the final answer will show in the cell. I will be able to review your calculation and correct, if necessary. | |
| c) F requires a number only. In some problems, a “Step 1” is added to help you solve the problem. | |
| d) Formula requires a written formula, not the numbers. For example, the rate of return = [(1 + nominal)/ (1+inflation)]-1, or D (debt) + E (equity) = V (value). | |
| 4. | Name your assignment file as “LastnameFirstinitial-BUSN602-Week#”, and submit by midnight ET, Day 7. |
DQ10-2
| Discussion Question 10-2 |
| What are the major sources of long-term funds available to business corporations? Indicate their relative importance. |
| Answer: |
| T |
DQ10-8
| Discussion Question 10-8 |
| Briefly describe the types of bonds that can be issued to provide bondholder security. |
| Answer: |
| T |
DQ10-11
| Discussion Question 10-11 |
| Why might a firm want to maintain a high bond rating? What has been happening to bond ratings in recent years? |
| Answer: |
| T |
E10-1
| Exercise 10-1 | |||
| Compute the annual interest payments and principal amount for a Treasury Inflation-Protected Security with a par value of $1,000 and a 3-percent interest rate if inflation is 4 percent in year 1, 5 percent in year 2, and 6 percent in year 3. | |||
| Answer: | |||
| Enter the answers in blue shaded cells | |||
| Par value | F | ||
| Interest rate | F | ||
| Year | Inflation | Par value | Annual coupon interest |
| 1 | F | C | C |
| 2 | F | C | C |
| 3 | F | C | C |
E10-4
| Exercise 10-4 | ||
| Assume a $1,000 face value bond has a coupon rate of 8.5 percent paid semiannually and has an eight-year life. If investors are willing to accept a 10 percent rate of return on bonds of similar quality, what is the present value or worth of this bond? | ||
| Answer: | ||
| Step 1: | ||
| Coupon rate | F | |
| Years to maturity | F | |
| Number of coupon payments per year | F | |
| Par value | F | |
| Market rate | F | (APR) |
| Step 2: | ||
| Compute periodic interest rate | C | |
| Compute number of periods | C | |
| Compute coupon cash flow | C | |
| Step 3: | ||
| Bond price (use PV) | C |
E10-6
| Exercise 10-6 | ||
| The Garcia Company’s bonds have a face value of $1,000, will mature in 10 years, and carry a coupon rate of 16 percent. Assume interest payments are made semiannually. | ||
| a. Determine the present value of the bond’s cash flows if the required rate of return is 16 percent. | ||
| b. How would your answer change if the required rate of return is 12 percent? | ||
| Answers: | ||
| Enter the answers in blue shaded cells | ||
| Step 1: | a. PV 16% rate of return | b. PV 12% rate of return |
| Coupon Rate | F | F |
| Years to maturity | F | F |
| Number of coupon payments per year | F | F |
| Par Value | F | F |
| Step 2: | ||
| Compute periodic interest rate | C | C |
| Compute number of periods | C | C |
| Compute coupon cash flow | C | C |
| Step 3: | ||
| Bond price (use PV) | C | C |
E10-23
| Exercise 10-23 | |
| The Joseph Company has a stock issue that pays a fixed dividend of $3.00 per share annually. Investors believe the nominal risk-free rate is 4 percent and that this stock should have a risk premium of 6 percent. What should be the value of this stock? | |
| Answer: | |
| Enter the answers in blue shaded cells | |
| Required return | C |
| Value of stock | C |
