Home / Questions / Interest rate fundamentals: The real rate of return Carl Foster, a trainee at an investm
Interest rate fundamentals:
The real rate of return Carl Foster, a trainee at an investment banking firm, is trying to get an idea of what real rate of return investors are expecting in today’s marketplace. He has looked up the rate paid on 3-month U.S. Treasury bills and found it to be 5.5%. He has decided to use the rate of change in the Consumer Price Index as a proxy for the inflationary expectations of investors. That annualized rate now stands at 3%. On the basis of the information that Carl has collected, what estimate can he make of the real rate of return?
P6–10 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?
P6–13 Valuation of assets
Using the information provided in the following table, find the value of each asset.
Cash flow
Asset End of year Amount Appropriate required return
A 1 $ 5,000 18%
2 5,000
3 5,000
B 1 through $ 300 15%
C 1 $ 0 16%
2 0
3 0
4 0
5 35,000
D 1 through 5 $ 1,500 12%
6 8,500
E 1 $ 2,000 14%
2 3,000
3 5,000
4 7,000
5 4,000
6 1,000
P6–20 Yield to maturity
The relationship between a bond’s yield to maturity and coupon interest rate can be used to predict its pricing level. For each of the bonds listed, state whether the price of the bond will be at a premium to par, at par, or at a discount to par.
Bond Coupon interest rate Yield to maturity Price
A 6% 10% _________
B 8 8 _________
C 9 7 _________
D 7 9 _________
E 12 10 _________
P7–1 Authorized and available shares
Aspin Corporation’s charter authorizes issuance of 2,000,000 shares of common stock. Currently, 1,400,000 shares are outstanding, and 100,000 shares are being held as treasury stock. The firm wishes to raise $48,000,000 for a plant expansion. Discussions with its investment bankers indicate that the sale of new common stock will net the firm $60 per share.
a. What is the maximum number of new shares of common stock that the firm can sell without receiving further authorization from shareholders?
b. Judging on the basis of the data given and your finding in part a, will the firm be able to raise the needed funds without receiving further authorization?
c. What must the firm do to obtain authorization to issue more than the number of shares found in part a?
P7–6 Common stock value—Zero growth
Kelsey Drums, Inc., is a well-established supplier of fine percussion instruments to orchestras all over the United States. The company’s class A common stock has paid a dividend of $5.00 per share per year for the last 15 years. Management expects to continue to pay at that amount for the foreseeable future. Sally Talbot purchased 100 shares of Kelsey class A common 10 years ago at a time when the required rate of return for the stock was 16%. She wants to sell her shares today. The current required rate of return for the stock is 12%. How much capital gain or loss will Sally have on her shares?
P7–14 Common stock value—All growth models
You are evaluating the potential purchase of a small business currently generating $42,500 of after-tax cash flow Do =$ 42,500. On the basis of a review of similar-risk investment opportunities, you must earn an 18% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm’s value using several possible assumptions about the growth rate of cash flows.
a. What is the firm’s value if cash flows are expected to grow at an annual rate of 0% from now to infinity?
b. What is the firm’s value if cash flows are expected to grow at a constant annual rate of 7% from now to infinity?
c. What is the firm’s value if cash flows are expected to grow at an annual rate of 12% for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity?
Nov 29 2019 Read more Less More
The circle in Fig. 5-8 represents a reversible engine. During some integral number or complete cycles the engine absorbs 1200 J from the reservoir at 400 K and performs 2...
Jun 06 2020Abey Kuruvilla, of Parkside Plumbing, uses 1,200 of a certain spare part that costs $25 for each order, with an annual holding cost of $24.a) Calculate the total cost for...
Jul 29 2020Which of the following concepts is not illustrated by the production possibilities frontier? A. Efficiency B. Opportunity cost C. Equity D. Tradeoffs
Apr 18 2020A treasure map directs you to start at a palm tree and walk due north for 15.0 m. You are then to turn 90° and walk 22.0 m; then turn 90° again and walk 5.00 m. Give the ...
Apr 02 2020The velocity of the 170 g hockey puck is = (10 i - 4 j) m/s. If you neglect the change in the velocity i of the stick resulting from the impact and the coefficient of r...
Jun 16 2020What is the value of having a formal and recent education in health organization management
Aug 26 2020Sorting through unsolicited e-mail and spam affects the productivity of office workers. An InsightExpress survey monitored office workers to determine the unproductive ti...
Aug 01 2020Suppose that when the price of corn is $2 per bushel, farmer scan sell 10 million bushels. When the price of corn is $3 per bushel, farmers can sell 8 million bushels.Whi...
May 30 2018Information will soon be so easy to find on the internet that people will not need to remember anything. Do you agree?
Feb 01 2020Mark Majors is considered to be self-absorbed and fundamentally insecure in his managerial position. He attempts to manipulate his subordinates and has a significant lack...
Mar 26 2018Welcome to MyCourseHelp Services, World's leading Academic solutions provider with Millions of Happy Students.