Question 4 a Price of the noncallable bond today coupon rateinterest rate 1000

Question 4 a price of the noncallable bond today

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Question 4 a. Price of the noncallable bond today = coupon rate/interest rate = ( $ 1,000 × 8% ) 7 % =$1,142.857 Price of bond today = $1,142.86
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b. Price of callable bond today = coupon rate + call price/(1+r) = ( $ 1,100 + $ 80 ) ( 1 + 7% ) = $ 1,180 1.07 =$1,102.80 Price of callable bond = $1,102.80 c. compensation for bearing the call risk = price of noncallable bond – price of callable bond = $1,142.86 - $1,102.80 = $40.06 compensation for bearing the call risk = $40.06 Question 5 Annual depreciation = $ 540,000 5 = $108,000 Depreciation tax shield = annual depreciation x tax rate =$108,000 x 0.35 = $37,800 The annual cost of lease payments is $145,000. After tax lease payment = before tax lease payment x (1- TC)
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= $ 145,000 x ( 1 0.35 ) = $94,250 The net cash flow in lease option will be $94,250+$37,800=132,050. Present value = $ 132,050 × ( 1 + 0.0585 5 0.0585 ) = $558,519.81 NAL = $540,000 - $558,519.81 = -$18,519.81 Since the NAL is negative, the firm should not lease the machine.
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  • Fall '15
  • Depreciation, levered firm, value of the company, value of a levered firm

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