Choose the right answer: 10- Suppose that you read in The Wall Street Journal th
ID: 2719280 • Letter: C
Question
Choose the right answer:
10- Suppose that you read in The Wall Street Journal that a bond has a coupon rate of 9 percent, a price of 71.375% (of face value) , and pays interest annually. Rounded to the nearest whole percent, what would be the bond’s “current” yield?
A. 11%
B.13%
C. 15%
D. 17%
E. 20%
11- A 12-year bond has a 9 percent annual coupon, a yield to maturity of 8 percent, and a face value of $1,000. What is the price of the bond?
A.$1,469
B.$1,000
C.$ 928
D.$1,075
E.$1,957
12. Tuttle Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected.
WACC: 12.00%
Year 0 1 2 3 4
Cash flows -$1,000 $350 $350 $350 $350
a. $77.49
b. $81.56
c. $63.05
d. $90.15
e. $94.66
13. Resnick Inc. is considering a project that has the following cash flow data. What is the project's payback?
Year 0 1 2 3
Cash flows -$350 $200 $200 $200
a. 1.42 years
b. 1.58 years
c. 1.75 years
d. 1.93 years
e. 2.12 years
14. How much would $5,000 due in 25 years be worth today if the discount rate were 5.0%?
a. $1,476.52
b. $1,124.16
c. $1,183.33
d. $1,245.61
e. $1,311.17
15. Bosio Inc.'s perpetual preferred stock sells for $97.50 per share and it pays an $8.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company's cost of preferred stock for use in calculating the WACC?
a. 8.72%
b. 9.08%
c. 9.44%
d. 9.82%
e. 10.22%
Explanation / Answer
Answer:
10 ---- Correct Answer is 13% (B)
Current Yield is the rate of return over next one year on the amount invested is called current yield.
Bonds Current Yield = Next Year Inflows / Current Bond Price x 100 = 9 / 71.375 x 100 = 12.60% or nearest to whole number 13%
11 ----- Correct Answer is D…$1,075
Current Price of Bond = Interest x PVIFA (8%, 12) + Maturity Value x PVIF (8%, 12) =
Interest = $1000 x 9% = $90
Maturity Value = $1,000
YTM = 8%
You can easily take the value of PVIFA (8%, 12) from Annuity Table and PVIF (8%, 12) from Present Value table or also can calculate from calculator.
Current Price of Bond = ($90 x 7.536) + ($1,000 x 0.397) = $678.24 + $397 = $1,075.24 or $1,075
12 ------ Correct Answer is …C. $63.05
Calculation of Net Present Value (NPV) of Project = PV of Cash Inflows – PV of Cash Outflows = $350 x PVIFA (12%, 4) - $1,000 = ($350 x 3.0373) - $1,000 = $1,063.05 - $1,000 = $63.05
13 ---- Correct Answer is C…1.75 Years
Since, Annual Cash inflow is similar, Payback Period = Initial Investment / Annual Inflow = $350 / $200 = 1.75 Years
Please seperate question number 14 & 15 ---- I will answer the same...thank you