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
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)
= \$ 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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