At what price will your bond be sold

Assignment Help Financial Management

Reference no: EM132371825

FINANCIAL MANAGEMENT ASSESSMENT

Instruction : This Assessment is open-book, and you may use your textbooks, other supporting material, and Excel financial formulae for your reference and assistance.

Please Answer ALL FIVE Questions. Each question carries equal mark.

1. (Repurchase of Stock) The B. Phillips Corporation is planning to pay dividends of $550,000. There are 275,000 shares outstanding, with an earnings per share of $6.

The stock should sell for $45 after the ex-dividend date. If instead of paying a dividend, management decides to repurchase stock:

a. What should be the repurchase price?

b. How many shares should be repurchased?

c. What if the repurchase price is set below or above your suggested price in part a?

d. If you own 100 shares, would you prefer that the company pay the dividend or repurchase the stock?

2. (Interest Rate Risk) Two years ago, your corporate treasurer purchased the firm a 30-year bond at its par value of $1,000. The coupon rate on this security is 7%. Interest payments are made to bondholders once a year. Currently, bonds of this particular risk class are yielding investors 9%. A cash shortage has forced you to instruct your treasurer to liquidate his bond.

a. At what price will your bond be sold? Assume annual compounding.

b. What will be the amount of your gain or loss over the original purchase price?

c. What would be the amount of your gain or loss had the treasurer originally purchased a bond with a 4-year rather than a 30-year maturity? (Assume all characteristics of the bonds are identical except their maturity periods.)

d. What do we call the type of risk assumed by your corporate treasurer?

3. D&D, Inc. reported the following results for 2007. Calculate D&D’s taxable income and resulting tax liability using the tax rates given.

	$
Sales	20,000,000
Cost of sales	8,000,000
Operating expenses	1,000,000
Depreciation expense	500,000
Interest expense	1,500,000
Common stock dividends paid	500,000
Dividends received from Corporation Z
(D&D owns 10% of Corporation Z)	100,000

Corporate Tax Rates 15%	Taxable Income $0 - $50,000
25%	$50,001 - $75,000
34%	$75,001 - $10,000,000
35%	over $10,000,000

Additional surtax of 5% on income between $100,000 and $335,000

Additional surtax of 3% on income between $15,000,000 and $18,333,333

4. Given the rate information in the table below, estimate the nominal rate for a AArated corporate bond. Assume a liquidity premium of 6 basis points. Identify as part of your answer the inflation risk premium, the default risk premium, the maturity premium, and the liquidity premium.

3-month T-bills 4.0%

30-year Treasury Bonds 6.0%

AA-rated Corp. Bonds 8.0%

Inflation Rate 2.5%

5. AAC, Inc. is planning to issue $5,000,000 in 180-day maturity notes paying a rate of 12 percent per annum. The company expects to incur costs of approximately $20,000 in dealer placement fees and other expenses of issuing the commercial paper. The company plans to back up their commercial paper offering with a line of credit from a bank for $5,000,000. The compensating balance requirement is 10 percent of the line of credit. The company normally maintains $450,000 in its accounts with the bank. What is the effective cost of the commercial paper offering?

Reading : (Attached below)

CHAPTER 1: AN INTRODUCTION TO THE FOUNDATIONS OF FINANCIAL MANAGEMENT

CHAPTER 5: THE TIME VALUE OF MONEY

CHAPTER 9: COST OF CAPITAL

CHAPTER 13: DIVIDEND POLICY AND INTERNAL FINANCING

Attachment:- Chapters.rar

Reference no: EM132371825

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