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    Compare and contrast the yields and maturities

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    Part One: Quantitative Exercises

    Barbow Enterprises, Inc., is considering an expansion in their operations. One of the first items they want to examine is their cost of capital. According to the accounting department, the following items and their respective costs have been identified:

    The cost of Common Equity: 15%
    The before tax cost of debt: 12%
    No Preferred stock
    They have also calculated the marginal tax rate to be 40% and the stock sells at its book value.

    Barbow Enterprises Inc.
    Balance Sheet

    Assets Liabilities and Owners' Equity

    Cash $240 Long Term Debt $2,304

    Accounts Receivable 480 Equity 3,456
    Inventories 720
    Net P&E 4,320

    Total Assets $5,760 Total Liabilities and owners'
    Equity $5,760

    Calculate Barbow's after-tax weighted average cost of capital, using the data in the balance sheet above.

    Part Two: Final Project 3: Government Securities

    In this part of your Final Project, you will research and analyze current information (that is, within the past two months) on government securities.

    Step 1: Go to a financial Web site to do your research. The following are three suggested sites, but you may use others. Be sure to cite your sources!

    finance.yahoo.com
    http://www.google.com/finance
    moneycentral.msn.com
    Step 2: Research current information (within the last two months) on the yields and maturity for:

    U.S. treasuries
    Municipal bonds
    Corporate bonds
    Required:

    Discuss what the pure expectations theory would imply about the yield curve.
    Compare and contrast the yields and maturities for each of the securities.
    Discuss which you would hold and why relative to interest rate risk.

    Criteria for above tasks:

    1. Correctly calculated Barlow's after-tax weighted average cost of capital.
    2. Researched the appropriate Web sites and obtained the necessary information on the securities indicated.
    3. Compared and contrasted the yields and maturities for each of the securities.
    4. Successfully used the expectations theory to predict future interest rate changes.
    5. Compared the relationship between maturities and yields between U.S. treasures, municipal bonds, and corporate bonds.
    6. Presented a structured report that is free of spelling and grammatical errors and cited sources in APA format when necessary.

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    Solution Preview

    Part One: Quantitative Exercises
    Barbow Enterprises, Inc., is considering an expansion in their operations. One of the first items they want to examine is their cost of capital. According to the accounting department, the following items and their respective costs have been identified:
    The cost of Common Equity: 15%
    The before tax cost of debt: 12%
    No Preferred stock
    They have also calculated the marginal ...

    Solution Summary

    Solution explains the Compare and contrast the yields and maturities and the cost of capital.

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