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GoGoMUCity Inc. plans to issue a perpetual callable bond that pays 10.29% annual coupons. The current interest rate is 8.1%. Two years later, there is 17% probability that the interest rate will be 4.7%, 44% probability that the interest rate will be 9.2% and 39% probability that the interest rate will be 14%. The bond is callable at par value of 1,000 plus 3 additional coupon payments and it will be called if the bond price is greater than the call price.
-Calculate the price of the callable bond. -What is the value of the call option? -What is the minimum coupon rate that the bond will be certainly called in two years?
The Cost of Capital
Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places.
Draw a graph showing the profits from the two-option portfolio as a function of the underlying asset's price. What are the numerical values of the profits for ST = 0 and ST = X?
Scott's company is looking at expanding into a new territory and needs to evaluate various financing plans. Below are the characteristics of each plan:
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How would the Many U.S. cities increase business taxes to help close their budget deficits events affect the demand for loanable funds in the United States?
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Which stock has the higher total risk and which has the highest systematic risk, which has the lowest? Explain your answer
The firm's weighted marginal cost of capital schedule is 12 percent for up to $6 million of investment; 16 percent for between $6 million and $18 million of investment; and above $18 million the weighted cost of capital is 18 percent.
After that period, growth should match the 6 percent industry average rate. The last dividend paid (D0) was $1. What is the value per share of your firm's stock?
Using the data available for the company comprising the largest percentage of your portfolio, calculate the dividend payout ratio, growth rate of the company's dividends, price-to-earnings (P/E) ratio, and the maximum P/E ratio that you would apply t..
Evaluate the impact of each of the following (independent) financial decisions on Southwick's current, quick, and debt-to-equity ratios: The firm reduces its inventories by $500,000 through more efficient inventory management procedures and invests t..
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