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Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had a 20-year life when issued and the annual interest payment was then 14 percent. This return was in line with the required returns by bondholders at that point as described below:
Assume that five years later the inflation premium is only 2 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 15 years remaining until maturity.
Compute the new price of the bond. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.
(Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.)
The GM bond trades at 94.95 (percent of par). What is the yield to maturity (YTM)? What should be the price of the Ford bond (in $)?
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Including real options in a capital budgeting analysis can raise, but not lower, a project's expected NPV as found in a traditional analysis.
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