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# Interest Rates and the Cost of Debt

### Word Problem

An old lady known to you as "Granny" has been evaluating an investment proposal from her son, Uncle Sal. Sal suggests that the investment is "too good to pass up," but based on past performance, Granny is suspicious. After doing some research, Granny has determined that Sal's investment has a high risk of default, for which sh

### Cost of debt and preferred stock, intrinsic value and speculative premium of warrants.

1) The treasurer of Riley Coal Company is asked to compute the cost of fixed income securities for her coroporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 2 percent less than that for preferred stock. Based on the following facts, is she correct? Debt can be issued at a y

### Total amount that parker should recorded as "bad debt expense"

The following information is available for the Parker Company: Credit sales during 2005 \$100,000 Allowance for doubtful accounts at December 31, 2004 1,200 Account receivable deemed worthless and written off during 2005 1,600 During 2005 Parker estimated that its bad debt expense should be 1% of all credit sales. As

### What was the annual interest rate?

A business invests \$10,000 in a savings account for two years. At the beginning of the second year, an additional \$3500 is invested. At the end of the second year, the account balance is \$15,569.75. What was the annual interest rate? keywords: solving, solve, evaluate, evaluating, finding, find

### Future Value of a Bond Fund

Bob has a rich uncle who wishes to help with his education. He will invest in a bond fund paying 4% compounded semi-annually and maturing in 18 years. How much should he invest if he wants the value of his bond fund to be worth \$85,000 when it matures? _____ ?

### A child's grandparents purchased a bond fund

A child's grandparents purchased a \$10,000 bond fund maturing in 18 years to be used for her college education. The bond fund pays 4% compounded semi-annually. How much will the bond fund be worth at maturity?

### What is the WACC for the following business that is 40% financed by common stock and 60% financed by debt

What is the WACC for the following business that is 40% financed by common stock and 60% financed by debt, if the tax rate is 20%. The stock pays no dividends and is priced at \$14 and is expected to rise to \$16 in one year's time. The bonds are selling for 102% of par value, 3 years to maturity and have a coupon rate of 10%.

### Warrants: Exercise Value of Warrants, Price of Warrants, Effect of different factors (life, variability, growth rate of stock price, dividend policy) on warrant's price, coupon interest rate on the bonds with warrants that the company wishes to sell.

Maese Industries Inc. has warrants outstanding that permit holders to purchase 1 share per warrant at a price of \$25. a. Calculate the exercise value of the firm's warrants if the common sells at each of the following prices: (1) \$20, (2) \$25, (3) 30, (4) \$100. (Hint: A warrant's exercise value is the difference between the s

### Principal and interest payment computations

Cal owes \$10,000 now, a lender will carry the debt for five more years at 10 percent interest. In this particular case, the amount owed will go up by 10 percent per year for 5 years. The lender then will require that Cal pay off the loan over the next 12 years at 11 percent interest. What will his annual payment be? 2) I

### Principles of Finance

(See attached file for full problem description) --- Rollins Corporation has a target capital structure consisting of 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Assume the firm has insufficient retained earnings to fund the equity portion of its capital budget. Its bonds have a 12 percent cou

### Loans and compensating balances

# 22 page 233 Columbus shipping co is negotiating with 2 banks for a 100,000 loan. Bankcorp of Ohio requires a 20 percent compensating balance, discounts the loan, and wants to be paid back in four quarterly payments. Cleveland bank requires a 10 percent compensating balance does not discount the loan but wants to be paid b

### Effective annual rates, value of the preferred stock

1) Bank A offers to lend me the required funds on a loan in which interest must be paid monthly, and the quoted rate is 8 percent. Bank B will charged 9 percent, with interest due at the end of the year. What is the difference in the effective annual rates charged by the two banks? 2) A corporation is growing at a constant r

### 4-12: Noncontrolling interest

David Company acquired 60 percent of Mark Company for \$300,000 when Mark's book value was \$400,000. On that date, Mark had equipment (with a 10-year life) that was undervalued in the financial records by \$60,000. Also, buildings (with a 20-year life) were undervalued by \$40,000. Two years later, the following figures are reporte

### A.After 12 months of making extra payments, what will be the loan balance? B. .After 12 months of making the regular payment and investing the \$50, what will be the loan balance? C. Under the regular payment and investing option, excluding the tax due on the interest earned, what is the investment balance after 12 months? D.Compare the scenarios of investment versus prepayment by examining the 60th payment, which occurs at the end of the fifth year. What is the difference between the (a) interest portion of that payment, (b) tax deduction for interest, and (c) principal balance? Finally, how much is in the investment account? See others also.

The data you will need for the prepayment scenario include the following. Loan Balance: \$135000 Current Payment: \$990.62 Additional Payment: \$50.00 Loan Interest Rate: 8.0% Loan Interest Deductibility: YES Investment Rate Return: 6.00%* Tax Bracket: 30.00% Investment Type: After-Tax *The Investment rate ret

### What interest rate does the bond offer?

A zero coupon bond which will pay \$1,000 in ten years is selling today for \$422.41. What interest rate does the bond offer? Lenny loanshark charges 1% per week on his loans. What APR must he report to consumers? Assume exactly 52 weeks in a year. What is the effective annual rate? If you take out an 8,000 ca

### Stock Buy Back Decision on a Zero Growth Firm

An short analysis (sheet) needs to be prepared using excel to decide whether the proposal should be accepted or rejected. --- You have the following data on Joe's Corporation: EBIT: \$1,000,000 Tax rate: 40% Cost of equity: 10% Joe's is a zero growth firm, and is currently financed entirely with equit

### Terms of sale-effective annual interest rate

A firm offers terms of 1/10, net 30. What effective annual interest rate does the firm earn when a customer does not take the discount? Without doing any calculations, explain what will happen to this effective rate if: a. The discount is changed to 2 percent. b. The credit period is increased to 45 days. c. The discoun

### Types of Debt - Pier 1

Use the Pier 1 Imports' financial statements to answer the following questions: To obtain Pier 1 Imports' financial statements you can go to www.Pier1.com and click on the link at the bottom of the first page titled Investor's Relations and then choose Annual Reports and Proxy Statements. 1. Does Pier 1 have a significant

### Index and Interest Rate Futures

Can you please provide me with brief response to my questions noted below Stock Index Futures How are stock index futures used? How are stock index futures priced? What is basis convergence? How do you hedge with stock index futures? Fundamentals of Interest Rate Futures What are T-bills and Eurodollars, and wh

### Should the analyst treat the interest expenses that will be payable and why?

Suppose an investment project will require debt financing. How should the analyst treat the interest expenses that will be payable and why?

### Value investing at nominal interest rate, compounded monthly

Which of the following amounts is closest to the end value of investing \$5,000 for one year and two months at a nominal interest rate of 6 percent compounded monthly? A) \$5,352 B) \$5,362 C) \$5,350 D) \$5,293 E) \$6,183

### Nominal interest rates

True or False Nominal interest rates imply that inflation is included in the discount rate, whereas real cash flows do not include the impact of inflation.

### COMPOUNDED INTEREST

Suppose you deposit \$10,000 for 2 years at a rate of 10%. Calculate the return (A) if the bank compounds annually (n = 1). Answer: A = 10000(1 + 0.1/1)^2 = \$10,201 We have first that P = \$10,000, r = 0.1 (10% expressed as decimal), t = 2 (2 years) n = 1. I FIGURED THIS? PLEASE ADVISE A-\$10,000(1 = .10)^2=10,000(1.1)^2 -

### Simple and compound interest calculation

1.) What is the incorrect description of a slope? a. The slope between two points is the change in y divided by the change in x. b. The slope between two pints is the rise over run. c. A slope in a linear function is a rate. d. A slope is the change in the input divided by the change in the output. e. The slope between two

### A. What are the prices of the two bonds if the relevant market interest rate for both bonds is 10 percent? b. If the market interest rate increases to 12 percent, what will be the prices of the two bond? c. If the market interest rate decreases to 8 percent, what will be the prices of the two bonds?

Consider two bonds A and B. The coupon rates are 10 percent and the face values are \$1,000 for both bonds. Both bonds have annual coupons. Bond A has 20 years to maturity while bond B has 10 years of maturity. a. What are the prices of the two bonds if the relevant market interest rate for both bonds is 10 percent? b. I

### Calculating the price of a bond

Microhard has issued a bond with the following characteristics: Principal \$1,000 Time to maturity: 20 years Coupon rate: 8 percent, compounded semiannually Semiannual payments Calculate the price of this bond if the stated annual interest rate, compounded semiannually, is a. 8 percent b. 10 percent c. 6 percent

### Annuities and Interest Rates

Annuities and Interest Rates. Professor's Annuity Corp. offers a lifetime annuity to retiring professors. For a payment of \$80,000 at age 65, the firm will pay the retiring professor \$600 a month until death. a. If the professor's remaining life expectancy is 20 years, what is the monthly rate on this annuity? What is the eff

### Times Interest Earned

A company has sales of \$1 million, tax rate of 40%, net profit margin of 6% and total interest charges of \$10,000 per year. What is the TIE ratio? I am unable to figure this out using the formula.

### Mortgage Rates and Calculations

Can someone please assist me with addressing these mortgage related questions? (See attached file for full problem description) --- Using the following personal assumption Monthly gross income \$3,000 Money you have in savings for a down payment \$25,000 Your monthly payments for all existing debts \$400 Property tax

### Note with below-market interest rate

On January 1, 2005, Company X sold land that originally cost \$400,000 to Company B. As payment, Company B gave Company X \$600,000 note. The note bears an interest rate of 4% and is to be paid in three annual installments of \$200,000 (plus interest on the outstanding balance). The first payment is due on December 31, 2005. The ma