inflation is used to maintain the ability to purchase the same number of socks.
b.
Since Complex Systems' bonds were issued, there may have been a shift in
the supply-demand relationship for money or a change in the risk of the firm.
When the required return is equal to the coupon rate, the bond value is
equal
to
the par value. In contrast in part a above, if the required return is less than
the coupon rate, the bond will sell at a
premium
(its value will be greater than
par).

CH 6 Q 3(P6-8)
CH 6 Q 4(P6-10)
1 yr rate of return
8%
debentures
1727
2 yr rate of return
8.50%
principal value
1,727,000
rate of return next yr
9.00%
coupon interest rate
9%
par value
1000
tax bracket
34%
annual interest payment
90
total interest expense
155,430
after tax interest cost
102,584
CH 6 Q 7(P6-18)
CH 6 Q 8(P6-19)
coupon interest rate
8%
coupon interest rate
15%
annual coupon rate
80
required return
par value
1000
bond A
12%
required return
6%
15%
YEAR
BOND VALUE
18%
15
$1,194.24
bond B
12%
12
$1,167.68
15%
9
$1,136.03
18%
6
$1,098.35
3
$1,053.46
1
$1,018.87
CH 6 Q 10(P6-22)
Yield to maturity
Par value
Coupon interest rate
Years to maturity
13%
5000
18%
8
sell at a premium
Year
Cash Flow
Yield to maturity
0
-5430
9%
1
900
ould sell at par
2
900
3
900
4
900
5
900
6
900
7
900
8
5900
c.
The greater the length of time to matu
re
d.
She should purchase bond A because its
b.
the bond value approaches the par
value
b.
The market value of the bond approaches its par value
approaches the coupon interest rate

CH 6 Q 5(P6-11)
par value
1000
coupon rate
5.80%
price quote
114.77%
YTM
4.703%
bond price
1,147.72
annual interest payment
58
current yield
5.05%
years
annual coupon rate
par value
bond value
3
150
1000
$1,072.05
3
150
1000
$1,000.00
3
150
1000
$934.77
13
150
1000
$1,192.71
13
150
1000
$1,000.00
13
150
1000
$852.71
Current value
PMT
YTM
5430
900
16.02%
c. The bond is selling at a
premium
because
its price is
greater
than the par value.
d.
The yield to maturity is
lower
than the
current yield because the former includes
$48.36 in price
depreciation
between today
and the May 15, 2027 bond maturity.
urity, the
more
responsive the market value of the bond is to changing
equired returns, and vice versa.
price is less responsive to changes in interest rates.
e as the time to maturity declines. The yield-to-maturity
e as the time to maturity declines.

CH 7 Q 1
shares of common stock
2,400,000
shares oustanding
1,300,000
held as treasurey stock
400,000
wishes to raise for a plant expansion
48,000,000
sale of new common stock
$40
1,100,000
total number of shares needed
1,200,000.00
additional number of shares needed
100,000.00
CH 7 Q 5 (P7-15)
annual dividend (D0)
$2.24
required return
16%
dividents grow annually
15%
N
3
constant annual growth rate
5%
N
4
D1
$2.58
D2
$2.96
D3
$3.41
PV D1-D3
$6.60
D4
$3.58
P3
$32.52
PV of P3
$20.83
MV
$27.44
max # of new shares of common stock
that the firm can sell without receiving
further authorization is
must amend its corporate charter to authorize the
issuance of additional shares.

CH 7 Q 2
Case
Type
Par value
A
Cumulative
$150.00
B
Noncumulative
$50.00
C
Noncumulative
$140.00
D
Cumulative
$100.00
E
Cumulative
$60.00
CH 7 Q 6
Offering price per share
$1.70
7%
16%
Market value of all debt
$2,000,000.00
Market value of preferred stock
$950,000.00
1,100,000
New growth rate
8%
Original Growth Rate
Year(t)
FCF
Present value(PV)
2020
$600,000.00
$517,241
2021
$650,000.00
$483,056
2022
$750,000.00
$480,493
2023
$900,000.00
$497,062
2024 to infinity $10,700,000.00
$5,909,515
Totals
$7,887,367
Common stock
$4,937,367
Value per share
$4.49
Growth rate of FCF, beyond 2023 to infinity
Weighted average cost of capital