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Question;Homework chapter 6;1-Zane Perelli currently has $100 that he can spend today on polo shirts;costing $25 each. Alternatively, he could invest the $100 in a risk-free U.S.;Treasury security that is expected to earn a 9% nominal rate of interest. The;consensus forecast of leading economists is a 5% rate of inflation over the;coming year.;a. How many polo shirts can Zane;purchase today?;b. How much money will Zane have at;the end of 1 year if he forgoes purchasing the polo shirts today?;c. How much would you expect the polo;shirts to cost at the end of 1 year in light of the expected inflation?;d. Use your findings in parts b and c;to determine how many polo shirts (fractions are OK) Zane can purchase at the end;of 1 year. In percentage terms, how many more or fewer polo shirts can Zane buy;at the end of 1 year?;e. What is Zane?s real rate of return;over the year? How is it related to the percentage change in Zane?s buying;power found in part d? Explain.;2-Bond interest payments before and after taxes Charter;Corp. has issued 2,500 debentures with a total principal value of $2,500,000.;The bonds have a coupon interest rate of 7%.;a. What dollar amount of interest;per bond can an investor expect to receive each year from Charter?;b. What is Charter?s total;interest expense per year associated with this bond issue?;c. Assuming that Charter is in a;35% corporate tax bracket, what is the company?s net after-tax interest cost;associated with this bond issue?;3 - Valuation Fundamentals: Imagine that you are trying;to evaluate the economics of purchasing an automobile. You expect the car to;provide annual after-tax cash benefits of $1,200 at the end of each year and;assume that you can sell the car for after tax proceeds of $5,000 at the end of;the planned 5-year ownership period. All funds for purchasing the car will be;drawn from your savings, which are currently earning 6% after taxes.;A. Identify the cash flows, their timing, and;the required return applicable to valuing the car.;B. What is the maximum price you would be;willing to pay to acquire the car? Explain.;4- Midland Utilities has outstanding a bond issue that;will mature to its $1,000 par value in 12 years. The bond has a coupon interest;rate of 11% and pays interest annually.;a. Find the value of the bond if the required return is;(1) 11%;(2) 15%, and;(3) 8%.;b. Plot your findings in part a on a set of ?required return (x axis)?market;value of bond (y axis)? axes.;c. Use your findings in parts a and b to discuss the relationship between the;coupon interest rate on a bond and the required return and the market value of;the bond relative to its par value.;d. What two possible reasons could cause the required return to differ from the;coupon interest rate?;5-The Salem Company bond currently;sells for $955, has a 12% coupon interest rate and a $1,000 par value, pays;interest annually, and has 15 years to maturity.;a.;Calculate the yield to maturity(YTM) on this bond.;b. Explain the relationship that exists;between the coupon interest rate and yield to maturity and the par value and;market value of a bond.

Paper#44924 | Written in 18-Jul-2015

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