Hi elbori!!
1. You purchased a bond 3 years ago . The bond was purchased at par value $1000
The interest rate on the bond is 8%. It matures in 3 years.
You want to sell the bond now. what do you expect to get if the
current interest rate is 6%.
The current price of a bond is the present value of the future
payments that the bond generates for you:
Bond Price = PV of Coupons + PV of Par value
We will use as discount rate the current interest rate of 6% .
For this bond you have that:
Coupon Payments = C = $1,000 * 0.08 = $80
To calculate the present value of the 3 future coupon payments use the
formula of the PV of a regular 3 years annuity:
PV coupons = C/I * [(1 - (1 / (1+I)^3))] =
= $80/0.06 * [(1 - (1 / (1.06)^3))] = (use a calculator here)
= $213.84
For reference on the formula see:
http://www.netmba.com/finance/time-value/annuity/
PV of Par = Par Value / (1+I)^3 =
= $1,000 / (1.06)^3 = (use a calculator here)
= $839.62
Bond price = PV coupons + PV of principal =
= $213.84 + $839.62 =
= $1,053.46
You can sell the bond at $1,053.46
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2. The seattle corporation has a capital structure of:
Type percent of structure required return
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debt 30% 8%
preferred stock 10% 12%
common stock 60% 15%
what is the wacc for seattle corp?
"...the assets of a company are financed by either debt or equity.
WACC is the average of the cost of each of these sources of financing
weighted by their respective usage in the given situation. By taking a
weighted average, we can see how much interest the company has to pay
for every dollar it borrows.
A firm's WACC is the overall required return on the firm as a whole.
It is the appropriate discount rate to use for cash flows similar in
risk to the overall firm."
"Weighted Average Cost of Capital - WACC"
http://www.investopedia.com/terms/w/wacc.asp
To calculate WACC you must multiply the cost of each capital component
by its proportional weight and then summing, so if we call:
Rp = required return of preferred stock
Re = required return of equity (common stock)
Rd = required return of debt
E = market value of equity
D = market value of debt
P = market value of preferred stocks
V = D + E + P
E/V = percentage of equity
D/V = percentage of debt
P/V = percentage of preferred stock
NOTE: since the tax rate is not mentioned we can assume that the debt
required return (Rd) is actually the after tax cost of debt.
Then WACC is:
WACC = (D/V)*Rd + (E/V)*Re + (P/V)*Rp
NOTE: since the tax rate is not mentioned, we can assume that the debt
required return is actually the after tax required return.
This problem assumes that:
Rp = 0.12
Re = 0.15
Rd = 0.08
E/V = 0.60
D/V = 0.30
P/V = 0.10
Now we can calculate the WACC:
WACC = (D/V)*Rd + (E/V)*Re + (P/V)*Rp =
= 0.30*0.08 + 0.60*0.15 + 0.10*0.12 =
= 0.024 + 0.090 + 0.012 =
= 0.126 = 12.60%
The WACC is 12.60% .
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I hope that this helps you. If you need a clarification, feel free to
request for it before rate this answer.
Regards,
livioflores-ga |
