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Racoon Corp, Frank Corporation, Dorthy Corporation, Moussawi

1. Racoon Corp's sales last year were $400,000, and its year-end total assets were $300,000. The average firm in the industry has a total assets turnover ratio (TATO) of 2.5. The new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average?

2. Frank Corporation's 5-year bonds yield 6.50%, and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the default risk premium for Frank's bonds is DRP = 0.40%, the liquidity premium on Frank's bonds is LP = 1.7% versus zero on T-bonds, and the inflation premium (IP) is 1.5%. What is the maturity risk premium (MRP) on a 5-year bond?

3. Dorthy Corporation issued 20-year, 7% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds has dropped to 6%. What is the new price of the bonds, given that they now have 19 years to maturity?

4 Moussawi Ltd's outstanding bonds have a $1,000 par value, and they mature in 5 years. Their yield to maturity is 9%, based on semiannual compounding, and the current market price is $853.61. The bonds have a par value of $1,000. What is the bond's annual coupon interest rate?

Solution Preview

1. Racoon Corp's sales last year were $400,000, and its year-end total assets were $300,000. The average firm in the industry has a total assets turnover ratio (TATO) of 2.5. The new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average?

Asset Turnover = Sales = 400,000 = 1.33
Total Assets 300,000

2.5 = 400,000
X

X = 160,000

Total assets should be 160,000. Therefore, the assets must be reduced by $140,000.

2. Frank Corporation's 5-year bonds ...

Solution Summary

This solution is comprised of a detailed explanation to answer by how much must the assets of Racoon Corp be reduced to bring the TATO to the industry average, what is the maturity risk premium (MRP) on a Frank Corporation's 5-year bond, what is the new price of the bonds of Dorthy Corporation, given that they now have 19 years to maturity, and what is Moussawi Ltd's annual coupon interest rate.

$2.19