Share
Explore BrainMass

# Interest Rates and the Cost of Debt

### Bootstrapping and Interest Rate Example Problem

Please I need help with this: One method used to obtain an estimate of the term structure of interest rates is called bootstrapping. Suppose you have a one-year zero coupon bond with a rate of r1 and a two-year bond with an annual coupon payment of C. To bootstrap the two-year rate, you can set up the following equation for t

### Estimate interest rates, inflation adjustment, pure interest rate

Part a) You have been assigned to estimate the interest rates that your company may have to pay when borrowing money in the near future. The following information is available. kPR = 2% MR = 0.1% for a 1 year loan increasing by 0.1% for each additional year LR = 0.05% for a 1 year loan increasing by 0.05% for each additio

### Collateralized Debt Obligations

OXFORD INVESTMENT GROUP Delta Bank and Trust was heavily involved in making home loans during the housing boom. Initially Delta held the loans until maturity. However, as the boom gradually increased over the past two decades Delta packaged the loans and sold them to investors. At first they held the loans for 5-7 years be

### Describe Federal Reserve history. What makes the Fed unique among central banks?

Federal Reserve Describe the history of the Federal Reserve System (the Fed), and not central banking in general. What makes the Fed unique among central banks? Include an explanation of all the tools the Fed uses to contract and expand the economy using money supply and interest rates. Your case should have an INTRODUCTI

### Step by step solution to calculate after tax cost of debt of a firm for a bond issuance

The Welch Corporation is planning a zero coupon bond issue. The bond has a par value of \$1000, matures in 10 years, and will be sold at an 80% discount, or for \$200. The firm's marginal tax rate is 40%. What is the annual after-tax cost of debt to Welch on this issue? a) 10.48% b) 10% c) 11.62% d) 14.79% e) 17.46%

### Rick and Stacy Stark, a married couple, are interested in purchasing their first boat. They have decided to borrow the boat's purchase price of \$100,000. The family is in the 28% federal income tax bracket. There are two choices for the Stark family: they can borrow the money from the boat dealer at an annual interest rate of 8%, or they could take out a \$100,000 second mortgage on their home. Currently, home equity loans are at rates of 9.2%. There is no problem securing either of these two alternative financing choices. Rick and Stacy learn that if they borrow from the boat dealership, the interest will not be tax-deductible. However, the interest on the second mortgage will qualify as being tax-deductible on their federal income tax return. a. Calculate the after-tax cost of borrowing from the boat dealership. b. Calculate the after-tax cost of borrowing through a second mortgage on their home. c. Which source of borrowing is less costly for the Stark family?

Rick and Stacy Stark, a married couple, are interested in purchasing their first boat. They have decided to borrow the boat's purchase price of \$100,000. The family is in the 28% federal income tax bracket. There are two choices for the Stark family: they can borrow the money from the boat dealer at an annual interest rate of 8%

### West Company: Amount to charge to bad debt expense under two methods

West Company had the following account balances at December 31, 2011 before recording bad debt expense for the year: Accounts receivable \$900,000 Allowance for uncollectible accounts (credit balance) 16,000 Credit Sales for 2011 1,750,000 West is considering the following methods of estimating bad debts for

### Enron Hid Debt in Secret Accounts - Johnson and Johnson

Enron hid debt in secret accounts. Johnson and Johnson removed all Tylenol from shelves when the integrity of the product was questioned. What business concept discussed in this course does this relate to?

### Interest Rate Risk and Bond Pricing

Two years ago your corporate treasurer purchased for the firm a 20-year bond at its par value of \$1,000. The coupon rate on this security is 8 percent. Interest payments are made to bondholders once a year. Currently, bonds of this particular risk class are yielding investors 9 percent. A cash shortage has forced you to instruct

### Zhao Automotive issues fixed-rate debt at a rate of 7.00%. Zhao agrees to an interest rate swap in which it pays LIBOR to Lee Financial and Lee pays 6.8% to Zhao. What is Zhao's resulting net payments? Net payment = Libor + .02% How would I calculate this with equations?

Zhao Automotive issues fixed-rate debt at a rate of 7.00%. Zhao agrees to an interest rate swap in which it pays LIBOR to Lee Financial and Lee pays 6.8% to Zhao. What is Zhao's resulting net payments? Net payment = Libor + .02% How would I calculate this with equations?

### Shorthand

Why do we need to use this shorthand so much in business?

### Dallas Instruments has a large bond issue whose covenants require: (1) that DI's interest coverage ratio exceeds 4.0; (2) that DI's ratio of tangible assets to long-term debt exceeds 1.50; and (3) that cumulative dividends and share repurchases not exceed 60% of cumulative earnings since the date of the issuance of the bonds. DI has earnings before interest and taxes of \$70 million and interest expense of \$14 million. Tangible assets are \$400 million and long-term debt is \$175 million. Since the bonds were issued, DI has earned \$200 million, paid dividends of \$40 million, and repurchased \$40 million of common stock. Is DI in compliance with its bond covenants?

A1. (Bond covenants) Dallas Instruments has a large bond issue whose covenants require: (1) that DI's interest coverage ratio exceeds 4.0; (2) that DI's ratio of tangible assets to long-term debt exceeds 1.50; and (3) that cumulative dividends and share repurchases not exceed 60% of cumulative earnings since the date of the issu

### Expanded Analysis - Toyota Motors

Perform an expanded analysis on the financial statements of Toyota Motors. Please use the most current financial statements available on www.sec.gov. Objectives: - Perform horizontal and vertical analysis, selected liquidity, profitability, and solvency ratios, and other selected financial ratios. - Complete an executi

### Research Study: University students buried in debt

I am currently working on a research project on UK universities students' buried in debts. The main purpose of my research is to find out the causes, consequences, and solutions to universities' students who are in debts. First of all, I really need some suggestions on where I can find credible resources for my research, ther

### Crown Company Sold Property to Leary: Balance of Discount on Notes Payable

On January 1, 2010, Crown Company sold property to Leary Company. There was no established exchange price for the property, and Leary gave Crown a \$2,000,000 zero-interest-bearing note payable in five equal annual installments of \$400,000, with the first payment due December 31, 2010. The prevailing rate of interest for a note o

### TVM Concepts for Retirement Planning

5.1 Assume you have \$1 million now, and you have just retired from your job. You expect to live for 20 years, and you want to have the same level of consumption (i.e., purchasing power) for each of these 20 years, after adjusting for inflation. You also wish to leave the purchasing power equivalent of \$100,000 today to your kids

### Compound Interest and Finance Problems

See the attached file. Compound Interest. For the next two problems apply formula: A = P(1 + i)n and use scientific calculator. I - interest rate per period in decimal form, annual rate divided by number of periods per year P - deposit n -total number of deposits over all given years Problem 1. Retirement Fu

### Euro Market Investment and Fund Raising: Calculate effective interest rates for all three currencies in both the Euromarket and the domestic market.

Euromarket investment and Fund Raising, a U.S.-based multinational company, has two subsidiaries, one in Mexico (local currency, Mexican peso, MP) and one in Japan (local currency, yen, ¥). Forecasts of business operations indicate the following short-term financing position for each subsidiary (in equivalent U.S. dollars):

### The Economic Outlook and Monetary and Fiscal Policy

Please summarize this in a paragraph: Chairman Ben S. Bernanke The Economic Outlook and Monetary and Fiscal Policy Before the Committee on the Budget, U.S. House of Representatives, Washington, D.C. February 9, 2011 Chairman Ryan, Ranking Member Van Hollen, and other members of the Committee, I am pleased to have this op

### Newlyweds Eric and Pamela - Find the total amount of interest that Eric and Pamela will pay over the 30 years of the mortgage.

Newlyweds Eric and Pamela have finally found the house that they have been looking for and are anxious to make an offer. The 3 bedroom house is on the market for \$156,100 and will require that the couple complete some repairs such as installing a new roof and replacing the deck in the back of the house. They estimate these rep

### Interest Tutorial: Supply and Demand Curves, Basis Point

SQ5-4,19 6-3 Explain why the supply curve in the classical theorey of interest rates has a positive slope. Why does the demand curve in the classical theory have a negative slope? What assumptions underlie the rational expectations view of interest? What exactly is a basis point? Why is it an important interest rate mea

### Measuring and Using the Cost of Capital

1) Individual: Measuring and Using the Cost of Capital a) Answer the following questions i) Your firm can borrow from its bank at a quoted rate of 8% per year. If your company is in the 35% tax bracket, what is your firm's cost of debt? ii) The beta of your firm is 0.80. If the risk-free rate of return is currently 4.5%, an

### Compound Interest

5-1B. (Compound interest) To what amount will the following investments accumulate? a. \$4,000 invested for 11 years at 9 percent compounded annually b. \$8,000 invested for 10 years at 8 percent compounded annually c. \$800 invested for 12 years at 12 percent compounded annually d. \$21,000 invested for 6 years at 5 percent com

### Risks dealing with debt, when are risks unacceptable; subprime mortgage crisis

1. What are the risks that are associated with debt, and why might those risks be unacceptable to a corporation that needs money? 2. How did mortgage-backed securities contribute to the subprime mortgage crisis that has been experienced recently?

### Using Macro Market Analysis Techniques

Use macro market analysis techniques to outline a portfolio construction plan. This should include the following: 1. Explore the relationship between the economy as measured by GDP and stock prices as measured by the S & P 500 post year 2000 2. Explore the general relationship of stock market, bond market, and interest

### Capitalizing interest

According to SFAS No. 34 interest on self-constructed assets should be capitalized. Present arguments in favor of capitalizing interest. Tie your arguments to the concepts and definitions found in the conceptual framework.

### Weighted marginal cost of capital

Business XYZ is interested in measuring its overall cost of capital. Assuming that the business will retain the current capital structure in the future elaborated below, what is the weighted marginal cost of capital schedule? The business is within a 34% tax bracket. Debt: The business can raise an unlimited amount of debt b

### As a firm initially substitutes debt for equity financing, what happens to the cost of capital, and why?

3. A firm's current balance sheet is as follows: Assets \$100 Debt \$10 Equity \$90 Debt/Assets After-Tax Cost of Debt Cost of Equity Cost of Capital 0% 8% 12% ? 10 8 12 ? 20 8

### Tax research problem dealing with deductibility

After several years of a difficult marriage, Donald and Marla agreed to a divorce. As part of the property settlement, Marla transferred to Donald corporate stock, a commercial building, and a personal residence. Donald transferred other property to Marla, but the fair market value of the property was \$600,000 less than the fair

### Money and Interest Rates

Money and Interest Rates Money and interest rates are important for individuals and businesses making decisions to finance purchases. The following articles deal with assessing conditions to finance purchases and important aspects of policy. Tom Woodruff has written an interesting and to-the-point article about effects of