Reference no: EM133053530

Question - Imagine you are the financial manager for a corporation purchasing farm equipment costing $900,000. The following questions pertain to this financial decision.

Q1. You have negotiated a $200,000 loan from Farm Credit with 6% APR compounded monthly. You agree to pay back the loan in monthly installments over the two years with the first payment due next month (24 payments in total). What is your monthly payment? Create an amortization schedule to track the principal and interest on the loan over its life. How much total interest is paid? What is the effective annual rate of this APR? 'What does it mean for the interest on this loan to be compounded monthly?

Q2. You plan to raise an additional $300,000 to purchase this equipment by selling bonds. You issue three hundred $1,000 par value bonds maturing in 10 years with annual coupon payments at a coupon rate of 6%. The yield to maturity (YTM) on these bonds is 6% compounded annually when they are issued. What is the value of a bond at issue? What is the value of a bond in 3 years if the YTM increases to 10% compounded annually? What are the implications of a credit downgrade for these bonds?

Q3. The remaining $400,000 for the building purchase will be financed by equity investment. The board of directors has agreed to issue additional shares to raise this money. Given the previous liabilities, only $1 annual dividends are expected for the next 3 years. Starting in year 4, the board plans to issue dividends of $2 a year growing at 5% annually. If the required rate of return for this business is 15% annually, what is the stock price today? How many shares must be issued at this stock price to raise the 400,000?