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Interest Rates and the Cost of Debt

Cost of capital changes when debt financing increases

Please assist in responding to the following questions regarding debt financing: As a firm initially substitutes debt for equity financing, what happens to the cost of capital, and why? If a firm uses too much debt financing, why does the cost of capital rise?

Contribution of security selection and contribution of asset allocation

Problem 1: Consider the following information regarding the performance of a money manager. The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocation in column (3), and the returns

Treasury bonds and the largest interest rate risk

Which of the following Treasury Bonds will have the largest amount of interest rate risk (price risk) and why? A. A 7% coupon bond which matures in 12 years. B. A 9% coupon bond which matures in 10 years. C. A 12% coupon bond which matures in 7 years. D. A 7% coupon bond which matures in 9 years. E. A 10%

Calculating an Account Balance: Example Problem

You just deposited $2,500 in a bank account that pays a 12% nominal interest rate, compounded quarterly. If you also add another $5,000 to the account on year (12 months) from now and another $7,500 to the account two years from now, how much will be in the account three years (12 quarters) from now? Please also show:

Consolidation and noncontrolling interest

On January 1, 2010, Doone corporation acquired 60 percent of the outstanding voting stock of Rockne company for 300,000 consideration. At the acquisition date, the fair value of the 40 percent noncontrolling interest was 200,000 and rockne's assets and liabilities had a collective net fair value of 500,000. Doone uses the equity

Calculating the price of bonds in various market interest rates

3) Assume that General Motors Corporation sold an issue of bonds with a 10-year maturity, a $1000 par value, a 10% coupon rate, and semiannual interest payments. a. Two years after these bonds were issued, the going rate on bonds such as these fell to 6%. Calculate the price at which these bonds would sell.

Create a Hedge with the Futures Contract for Zinn Company

Chapter 23. Ch 23-06 Build a Model Problem 23-6. Use the information and data from Problem 23-5 Problem Inputs: Size of planned debt offering = $10,000,000 Anticipated rate on debt offering = 11% Maturity of planned debt offering = 20 Number of months until debt

Long term debt firm

Why does a firm use long-term debt? The week 3 lecture points out advantages and disadvantages of long term debt. Do the advantages of long-term debt outweigh the disadvantages? At what point is a firm over burdened with debt? Why do some large, publicly held firms have little or no long-term debt on their balance sheets?

Personal Finance Concepts- revolving charge account interest rate charges

Nancy Tai has recently opened a revolving charge account with MasterCard. Her credit limit is $1000, but she has not charged that much since opening the account. Nancy hasn't had the time to review her monthly statements as promptly as she should, but over the upcoming weekend, she plans to catch up on her work. In reviewing

Competitive Analysis and Business Cycles

Need help with using a Internet site to chart the price history of the coca cola company over the past five years (2006 - 20100. You can simply look at the purchase price in each year from 2006 and the selling price today in 2010. It is better to sort your historical stocks by clicking "monthly." After finding the stock pri

Assessing a problem about leveraging

Leverages Mr. Jim Smith is considering the possibility of opening his own machine shop .He expects first year sales to be AED. 600,000 , and he feels that his variable costs will be approximately 50% of sales . His fixed costs in the first year will be AED. 250,000. Jim will need to raise AED 800,000 to start the busine

Debt Capacity

You have recently acquired a family business that has no debt. You are interested in borrowing funds for other prospective acquisitions. You learn that to be able to keep your company at a level of "investment grade" and to be able to borrow at 6.5%, your operating cash flow coverage must be at least three times debt service.

Future value calculations and tables

A, Future value calculation Without referring to tables or to the preprogrammed function on your financial calculator, use the basic formula for future value along with the given interest rate, i, and the number of periods, n, to calculate the future value interest factor in each of the cases shown in the following table.

Interest Rates: Example Problems

Show steps to find each answer. 1. At 7.8% compounded monthly, how long would it take to accumulate $14,000 if you started with $10,500? Ans: 44.4 months 2. You start a RRSP on November 1, 1995 with a deposit of $3500, you add $2000 on Nov. 1, 1997 and $5500 on Nov. 1, 1999. If interest is 11% p.a. compounded quarterly

Lessee's Interest Expense

On January 1, 2004, Zale, Inc. signed a ten-year lease with annual lease payments of $90,000 starting at the beginning of the lease term, and title passing to Zale at the expiration of the lease. The leased property has an estimated useful life of 11 years, with no salvage value. The lessee's incremental borrowing rate was 13.7%

Nominal and effective annual interest rates for two alternatives

Your child's orthodontist offers you two alternative payment plans. The first plan requires a $4,000 immediate up-front payment. The second plan requires you to make monthly payments of $137.41, payable at the end of each month for 3 years. What nominal and effective annual interest rate is built into the monthly payment plan?

Interest rate finding

Your child's orthodontist offers you two alternative payment plans. The first plan requires a $4,000 immediate up-front payment. The second plan requires you to make monthly payments of $139.68, payable at the end of each month for 3 years. What nominal and effective annual interest rate is built into the monthly payment plan?

Effective Interest rates

East Coast Bank offers to lend you $25,000 at a nominal rate of 7.5%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Midwest Bank also offers to lend you the $25,000, but it will charge an annual rate of 8.3%, with no interest due until the end of the year. What is the difference in

Troubled debt

What types of situations result in troubled debt? What are some of the general rules for recognizing gain or loss by both parties in a troubled debt situation? How would you report these gains or losses?

Noncontrolling Interest Sections of the Work Paper

What sections of the work paper are included for noncontrolling interest? Why is the existence of noncontrolling interest significant when preparing consolidated financial statements? What are some advantages and disadvantages of the economic unit, parent organization, and proportionate consolidation concepts?

Interest Rate

1) The principal plus interest at 10% compounded quarterly on a $15000 loan made 2.5 yrs ago is due in two years. The debtor is proposing to settle the debt by a payment of $5000 today and a a second payment in one year that will place the lender in an equivalent financial position, given that money can now only 6% compound

Imputed Interest

Calculate imputed interest of the following debt. The question really is from the amount of this debt, what is the amount (total) is the imputed interest (not interest rate) of this debt and how do I calculate it? Also of that debt (with imputed interest amount) what portion (amount) is the short term and long term. Rate=7

4 Multiple Choice Bond: PV, accrued interest, discount, premium, effective rate

2. The market price of a bond issued at a discount is calculated by taking the present value of its principal amount using the market (effective) rate of interest a. plus the present value of all future interest payments using the market (effective) rate of interest. b. plus the present value of all future interest payments us

Annual coupon interest rate

Outstanding bonds have a $1,000 par value and will mature in 5 years, yield to maturity is 9%, based on seminannual compounding, and the current market price is $853.61, par value of $1000. What is the bonds's annual interest rate?

Calculations

1. Calculating the Number of Periods - You're trying to save to buy a new $170,000 Ferrari. You have $40,000 today that can be invested at your bank. The bank pays 5.3 percent annual interest on its accounts. (a) How long will it be before you have enough to buy the car? (b) If you believe your mutual

Real Risk Free Rate of Interest Explanation

Treasury securities that mature in 6 years currently have an interest rate of 8.5%. Inflation is expected to be 5% each of the next three years and 6% each year after the third year. The maturity risk premium is estimated to be 0.1% (t-1), where t is equal to the maturity of the bond (i.e. the maturity risk premium of a one year

Present Value of $10,000 with Varying Interest Rates

What is the present value of $10,000 received a. 12 years from today when the interest rate is 4% per year? b. 20 years from today when the interest rate is 8% per year? c. 6 years from today when the interest rate is 2% per year?

Rate of inflation, real interest rate, tax-free investment

22. If the rate of inflation is 5%, what nominal interest rate is necessary for you to earn a 3% real interest rate on your investment? 30. You best taxable investment opportunity has an EAR of 4%. You best tax-free investment opportunity has an EAR of 3%. If your tax rate is 30%, which opportunity provides the higher af

Stock Market Evaluation

Can you help me get started with this assignment? Briefly summarize and explain why the stock market and the interest rates might have moved in that manner on that particular date. Please see attached file(s) for complete details!