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# Interest Rates and the Cost of Debt

### Effective Cost of Trade Credit & Annual Interest Rate

The D. J. Masson Corporation needs to raise \$500,000 for 1 year to supply working capital to a new store. Masson buys from its suppliers on terms of 3/10, net 90, and it currently pays on the 10th day and takes discounts, but it could forgo discounts, pay on the 90th day, and get the needed \$500,000 in the form of costly trade c

### Mime Theatrical Supply: calculate effective interest rate

Mime Theatrical Supply is in the process of negotiating a line of credit with two local banks. The prime rate is currently 8 percent. The terms follow: Bank Loan Terms 1st National 1 percent above prime rate on a discounted basis and a 20 percent compensating balance on the face value of the loan. 2nd National 2 percen

### Excel Partnership: Value of Jaime's consulting services for interest in Excel Partnership.

5. Jaime performed consulting services for Excel Partnership in exchange for a 10 percent interest in its capital and profits. The FMV of the partnership's assets immediately before Jaime's admission was \$1,500,000. The partnerships tax basis in the assets was \$800,000. How much income does Jaime recognize from this transaction?

### Effective Annual Rates: 2 calculations

A company needs to arrange financing for its expansion program. Bank "1" offers to lend the company the rquired funds on a loan where the interest must be paid monthly and the quoted rate is 8%. Bank "2" will charge 9% with interest due at the end of the year. What is the difference in the effective annual rates charged by the t

### Nominal rate of interest on a 25 year BBB bond in several sets of circumstances

Compute the nominal rate of interest on a 25 year BBB bond issue for a company given the following sets of circumstances: 1. The default risk premium is estimated to be the difference between the average yield on BBB rated bonds (12.75%) and 25 year treasury bonds (5.15%). 2. Due to the questionable economic outlook of s

### 401(K) Plan

Your friend, Sal, wants to know how much he would save in taxes by contributing to his 401(k) plan. He can invest up to 10% of his income into the plan. His current income is US\$50,000 per year, and he is in the 25% tax bracket. In a memo to your friend that outlines how much he would save in taxes by contributing to his 401(

### Ordinary Annuities, Present and Future Values

A. Joe won a lottery jackpot that will pay him \$12,000 each year for the next ten years. If the market interest rates are currently 12%, how much does the lottery have to invest today to pay out this prize to Joe over the next ten years? B. Mary just deposited \$33,000 in an account paying 10% interest. She plans to leave the

### After-tax cost of debt, yield to maturity

Problem # 11-3 Calculate the after-tax cost of debt under each of the following conditions. Yield Corporate Tax Rate a. ..... 8.0 % 18 % b. ....12.0 % 34 % c. ....10.6 % 15 % Problem # 11-9 Mead Corporation is plannin

### Devon Harris: Amortization Schedule for bond interest and discount amortization

Devon Harris Company sells 10% bonds having a maturity value of \$2,000,000 for \$1,855,816. The bonds are dated January 1, 2007, and mature January 1, 2012. Interest payable annually on January 1. Instructions: Set up a schedule of interest expense and discount amoritzation under the effective interest method (Hint: the e

### Impact of interest rates on stock market values

Suppose you hear a stock broker state that when interest rates fall, the stock market tends to rise. Create a graph to explain this particular reasoning using the following 1. What are the axis? 2. Describe the slope - positive, negative? 3. What factors would cause a movement along the graph? 4. What factors might caus

### Interest rate risk, credit rationing and minimum capital

1) Interest Rate Risk a) What is interest rate risk? b) Discuss briefly the interest rate risk for Finansbank and make suggestions to deal with it 2) Credit Rationing a) What is credit rationing? b) From a practical point of view how would you proceed to distinguish credit rationing from a decline in credit supply?

### Effective annual interest of trade discounts

Trade Credit Rates - What effect will the following actions have on the implicit interest rate charged to customers that pass up the cash discount? State the effective annual interest rate for these terms. Discuss why a buyer would want to maybe borrow money to be able to take advantage of the cash discount terms rather than

### Universal Bank pays 7 percent interest, compounded annually, on time deposits.

Universal Bank pays 7 percent interest, compounded annually, on time deposits. Regional Bank pays 6 percent interest, compounded quarterly. a. Based on effective interest rates, in which bank would you prefer to deposit your money? Why b. Could your choice of banks be influenced by the fact that you might want to withdraw

### 3. Which items in Table 31.8 would be affected by the following events? a. There is a rise in interest rates. b. Suppliers demand interest for late payment. c. Dynamic receives an unexpected bill in the third quarter from the Internal Revenue Service for underpayment of taxes in previous years.

I need help with problem 3. Please see attachments. 3. Which items in Table 31.8 would be affected by the following events? a. There is a rise in interest rates. b. Suppliers demand interest for late payment. c. Dynamic receives an unexpected bill in the third quarter from the Internal Revenue Service for underpayment

### Interest and rate of cost

8) Warren calls home from Iraq at a rate (in dollars) of \$2.25 for the first minute plus \$.20 for each additional minute. If his total bill for the call is \$11.65, then for how many minutes did he talk altogether? (Don't forget the first minute). 9) Lindsey is driving on the Beltway on her way to the UMUC campus. Her car

### On the day of the child's birth, a proud parent deposits an amount of money into a compound interest savings account that will earn 5% each year. On the child's eighteenth birthday, the account will have accumulated \$10,000. How much did the parent deposit on the day of the child's birth?

On the day of the child's birth, a proud parent deposits an amount of money into a compound interest savings account that will earn 5% each year. On the child's eighteenth birthday, the account will have accumulated \$10,000. How much did the parent deposit on the day of the child's birth?

### Relationship between interest rate and maturity

What's a simple way to assess and compare the default risk of publicly traded bonds? Describe how a bond's interest rate risk is related to its maturity.

### Bad Debt Ratios for Universal Bed Corporation

1. As treasurer of the Universal Bed Corporation, Aristotle Procrustes is worried about his bad debt ratio, which is currently running at 6 percent. He believes that imposing a more stringent credit policy might reduce sales by 5 percent and reduce the bad debt ratio to 4 percent. If the cost of goods sold is 80 percent of the s

### Finance - The Calculation of Compound Interest

5. Summary - In 1991 an Apache tracker was promised \$10,000 for helping to capture the notorious outlaw Denny the Menace. In 2006 the daughter of the tracker claimed that this reward had not been paid. The Treasury Secretary stated that if this was true, the government would be happy to pay the \$10,000. However, the daughter al

### Interest

suppose the deposit \$20,000 for 5 yrs @ 8% rate what is the return annually (n = 1) and quarterly (n = 4). Round both to the hundredth place. c) Does compounding annually or quarterly yield more interest and explain d) if a bank compounds continuously the the formula used is A=Pe^rt where e is a constant and equals

### Prime or Subprime: The Good, the Bad and the Ugly

Prime or Subprime: The Good, the Bad and the Ugly I am sure most of you, at least I hope so, have followed the national and international effects the meltdown in the Subprime mortgage market. Before we get started, please answer the following question: 1. What exactly is the Subprime Mortgage Market? Please provide detai

### Calculating the cost of debt

Ying Import has several bond issues outstanding, each making semiannual interest payments. The bond are listed in the following table. If the corporate tax rate is 32%, what is the aftertax cost of Ying's Debt? BOND COUPON RATE RICE QUOTE MATURITY FACE VALUE

### Hedging using futures and options, working capital, after tax yield, borrowing rates, floats

Question 1 A gold-mining firm is concerned about short-term volatility in its revenues. Gold currently sells for \$300 an ounce, but the price is extremely volatile and could fall as low as \$280 or rise as high as \$320 in the next month. The company will bring 1,000 ounces to the market next month. a. What will be total reven

### Total interest expense

Kim Co issued \$80,000 of 4% bonds on June 1, 2007 at face value. The bonds pay interest semiannually on February 1 and August 1. The bonds are dated February 1, 2006, and a mature on February 1, 2010. The total interest expense related to these bonds for the year ended December 31, 2006 is I am stuck. The actual problem is si

### Number of tickets to be sold to service the debt

The Florida Boosters Association has decided to build new bleachers for the football field. Total costs are estimated to be \$1million, and financing will be through a bond issue of the same amount. The bond will have a maturity of 20 years, a coupon rate of 8% and has annual payments In addition, the Association must set up a re

### Retirement Savings Case Study

Saving for Retirement? Better late Than Never! "Boy, this is all so confusing," said John as he stared at the papers on his desk. If only I had taken the advice of my finance instructor, I would not be in such a predicament today." John Andrews, aged 27, graduated five years ago with a degree in business administration and

### Finance Questions - Compound Interest & Security Investments

Chapter 3: What types of personal financial decisions have you made that involve compound interest? Be specific and cite any references. Chapter 4: Read the following article: http://www.investinginbonds.com/MarketAtAGlance.asp?catid=31&id=78 Discuss which type of security you might invest in if you had spare fu

### Maturity dates, yield to maturity, and stocks

List the long-term debt held by Dell Computers as well as maturity dates and yield to maturity. Please also list the types of stock issued by Dell Computers including the current selling price and the 52-week average selling price. Please review the attached files for the 2005 & 2006 Annual Report.

### Interest Rate & Purchasing Power Parity

1. Interest Rate Parity Six month T-bills have a nominal rate of 7%, while default free Japanese bonds that mature in 6 months have a nominal rate of 55%. In the spot exchange market, I yen equals \$0.009. If interest rate parity holds, what is the 6 months forward exchange rate?. 2. Purchasing Power Parity: A televisi

### Single-Payer Health Care System

QUESTION What is unique in the area of interest Single payer healthcare system which makes conventional economic principles not applicable? http://www.labornotes.org/node/662 http://www.manhattan-institute.org/html/mpr_05.htm Single-Payer Fantasies of Sicko, Michael Moore