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# Discount terms; price and YTM of bond; financial st

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1) A firm offers terms of 2/15, net 48. What effective annual interest rate does the firm earn when a customer does not take the discount?

2) What is the Current Price and Yield to Maturity of a 8% semi-annual coupon bond if it has a current yield of 9.3% and matures in 10 years?

3) Use the following list of accounts and balances, to prepare a balance sheet, income statement, cash flow statement and statement of retained earnings for Nina's FIRST YEAR in business, Nina has a 60% gross profit margin and 30% tax rate:

Cash \$10,000 Depreciation Exp 5,000
Unearned Revenue 7,000 Accts Rec 18,000
Dividends 2,000 Common Stock ?
Prepaid Exp 2,000 Accum. Deprec. ?
Accts Payable 23,000 Office Equipment 30,000
Operating Exp 15,000 Ending Ret. Earning ?
Sales 50,000 COGS ?
Inventory 20,000 Tax Expense

#### Solution Preview

1) A firm offers terms of 2/15, net 48. What effective annual interest rate does the firm earn when a customer does not take the discount?

The effective rate is calculated as (1+ periodic rate)^compounding frequency - 1
The periodic rate is calculated as % discount/(100-% discount) = 2/98 = 0.02041 and the compounding frequency is calculated as 365/(Payment days - discount period) = 365/(48-15) = 11.06
Effective annual rate = (1+0.02041)^11.06-1 = 25.04%

2) What is the Current Price and Yield to Maturity of a 8% semi-annual coupon bond if it has a current yield of 9.3% and matures in 10 years?

Current yield = Annual Interest/Price
Annual interest = 1,000X8% = \$80 and the current yield = 9.3%
Price = Annual interest/current yield = 80/9.3% = \$860.22
The Yield to Maturity (YTM) is the discounting rate ...

#### Solution Summary

The solution explains some questions relating to discount terms; price and YTM of bond and preparation of financial statements

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## Financial statement analysis bonds

I need help with homework assignment, please.

1. (Financial Statement Analysis)

Consider the following sets of financial statements and answer the questions that follow:

a. To which firm would you prefer to lend money? Why?

b. In which firm would you prefer to invest? Why?

2. (Time Value of Money - Monthly Loan Payments)

Best Buy has a flat-screen HDTV on sale for \$1,995. If you could borrow that amount from First National Bank of St Louis at 6% for 1 year, what would be your monthly loan payments?

3. (Time Value of Money - Present Value)

You would like to have \$1,000,000 accumulated by the time you turn 65, which will be 40 years from now. How much would you have to put away each year to reach your goal, assuming you're starting from zero now and you earn 5% annual interest on your investment?

4. (Risk & Return)

You hold a portfolio of stocks consisting of the following:

Stock Beta Current Value

John Deere 1.0 \$20,000
BankAmerica 0.6 \$23,000
McDonalds 0.7 \$18,000
Boeing 1.1 \$16,000
Total: \$77,000

a. What is the beta of the portfolio?

b. You have decided to sell Boeing for \$16,000 and to use the proceeds to buy \$16,000 of Raytheon stock with a beta of 1.5. After the transaction is complete, what will be the new beta of the portfolio? (Disregard any commissions on the buy and sell transactions.)

5. (Risk & Return)

a. Define the Capital Asset Pricing Model.

b. Explain what a stock's "beta" is.

c. If the risk-free rate is 1% and the expected rate of return on the stock market is 7%, what is the required rate of return per the CAPM for a stock that has a beta of 1.2?

6. (Bond valuation)

a. Joe's Company's bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a \$1,000 par value, and the coupon interest rate is 6%. The bonds have a yield to maturity (YTM) of 9%. Given these conditions, what should be the current price of these bonds?

b. Jane's Company's bonds have 5 years remaining to maturity. Interest is paid annually, the bonds have a \$1,000 par value, and the coupon interest rate is 7%. The bonds have a current market price of \$850. Given these conditions, what should be the yield to maturity (YTM) of these bonds?

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