Acme Chemical, Inc. is a major manufacturer of chemical products for the agriculturalndustry, including pesticides, herbicides and other compounds. Due to a number of law suitselated to toxic wastes, Acme Chemical has recently experienced a market re-evaluation of itscommon stock. The firm also has a bond issue outstanding with 10 years to maturity and anannual coupon rate of 5 percent, with interest paid semi annually. The required nominal marketannual interest rate on this bond has now risen to 10 percent due to the high risk level associatedvith this firm. The bonds have a par or face value of $1,000.1. Label each of the variables that you would use to determine the value of this bond in themarket today:N (time periods until maturity)PMT (periodic interest payment)I per (periodic market interest rate)EV (future value to be received when the bond matures) =2. Based on the variables that you have identified in Question #1, what is the market value.today (the present value or PV) of one of Acme Chemical's bonds? aLabel each of the variables that you would use to determine the new value of this bondin the market:N (time periods until maturity)PMT (periodic interest payment)I per (periodic market interest rate)EV (future value to be received when the bond's mature) =b Based on the variables that you have identified in Question #3.a., what is the new marketvalue (the present value or PV) of one of Acme Chemical's bonds, following their victoryin appeals court?1. Why do you suppose that the market value of Acme Chemical's bonds has risen following thefirm's victory in appeals court?

Bonds Bonds are referred to as fixed-income instruments which show a loan made by an investor to a…

Answered: Acme Chemical, Inc. is a major…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Solar 123 Limited (SL) is operating in the Boom energy sector. The company recognized that to stay competitive it must Implement projects which would reduce the cost of the products. SL's board of directors approved the recommendation Finance the project by issuing new debt. On January 1, 2019, SL issued new bonds which will mature on December 31, 2038. The bonds have a par value of $1,000 and a coupon rate of 13%. Coupon payments are made semi-annually. i) What would the value of the bonds on December 31, 2021, if the interest rates had risen to 18%? based on the price of the bon, how would you classify the bond" ii)What woul dbe the value on June 30, 2027, if interest rates had fallen to 10%? Based on the price of the bond, how would you classify the bond? iii) If the bonds had a value of $1,080 on June 13, 2027, what would be their yield to maturity on that date?
Energy Plus Limited (EP) is operating in the booming energy sector. The company recognized that to stay competitive it must implement projects which would reduce the cost of products to its customers. EP’s board of directors approved the recommendation to finance the project by issuing new debt. On January 1, 2014, EP issued new bonds which will mature on December 31, 2038. The bonds have a par value of $1,000 and a coupon rate of 12%. Coupon payments are made semi-annually. a) What would be the value of the bonds on December 31, 2018, if the interest rates had risen to 16%? Based on the price of the bond, how would you classify the bond? b) What would be their value on June 30, 2026, if interest rates had fallen to 8%? Based on the price of the bond, how would you classify the bond? c) If the bonds had a value of $860.00 on June 30, 2024, what would be their yield to maturity on that date?
Komissarov Company has a debt investment in the bonds issued by Keune Inc. The bonds were purchased at par for $400,000 and, at the end of 2020, have a remaining life of 3 years with annual interest payments at 10%, paid at the end of each year. This debt investment is classified as held-for-collection. Keune is facing a tough economic environment and informs all of its investors that it will be unable to make all payments according to the contractual terms. The controller of Komissarov has prepared the following revised expected cash flow forecast for this bond investment. Dec. 31 Expected Cash Flows 2021 $ 35,000 2022 35,000 2023 385,000 Total cash flows $455,000 Instructions a. Determine the impairment loss for Komissarov at December 31, 2020. b. Prepare the entry to record the impairment loss for Komissarov at December 31, 2020. c. On January 15, 2021, Keune receives a major capital infusion from a private equity investor. It informs Komissarov that the…
Ten years ago, DEWA, an electricity and water authority, issued $20 million worth of municipal bonds that carried a coupon rate of 6% per year, payable semiannually. The bonds had a maturity date of 25 years. Due to a worldwide recession, interest rates dropped significantly enough for the utility to consider paying off the bonds early at a 10% penalty to the face value. DEWA would then reissue the bonds at the same face value (i.e., $20 million) for the remaining 15 years, but at a lower coupon rate of 2% per year, payable semiannually. What would be the semiannual rate of return to DEWA, if it proceeds with this plan?
Assume that Riverbed Inc. invests in a bond for $120,000. The bond was purchased at par and is accounted for using amortized cost. At year end, management has determined that there is no significant increase in credit risk, but that there is a 4% chance that the company will not collect 14% of the face value of the bond (which also represents the present value of the bond) in the next 12 months. The expected loss model is used.Prepare the required year-end journal entry. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit
Outer Wilds Inc. hired you as a consultant to estimate the company's WACC. You have obtained the following information. (1) The company's noncallable bonds mature in 20 years, have a coupon rate of 6.00% paid annually, a par value of $1,000, and a current market price of $900. (2) The company's tax rate is 25%. (3) The required rate of return on the company's common stock based on CAPM is 10.0 %. ( 4 ) The target capital structure consists of 40% debt, with the remainder comprised of common equity. What is its WACC? 6.69% O 8.78% O 7.12% O 7.47% O 8.08%
Stardom Manufacturing Company (SMC) is in the construction industry for many years. Recently, the issue of financing has been raised since the company is concerned about additional financing of the company and the sources of funding. A recent audit of the company’s financial position has indicated the following details: The company has acquired a bond at face value with an interest rate of 10%. The can issue new Preference shares at $7.50 per share and offer dividend of $75 per share. The ordinary shares of Stardom has a market value of $60 per share and the firm is expecting to pay dividend of $4.50 per share one year later with anticipated growth rate of dividend of 6%. The company’s tax rate is 40%. TASK 1: using the above information help the financial controller to calculate: The cost of Debt financing after tax. The cost of Ordinary Share financing. The cost of Preference Shares financing. TASK 2: Using information above, what is the weighted average cost of…
Stardom Manufacturing Company (SMC) is in the construction industry for many years. Recently, the issue of financing has been raised since the company is concerned about additional financing of the company and the sources of funding. A recent audit of the company’s financial position has indicated the following details: The company has acquired a bond at face value with an interest rate of 10%. The can issue new Preference shares at $7.50 per share and offer dividend of $75 per share. The ordinary shares of Stardom has a market value of $60 per share and the firm is expecting to pay dividend of $4.50 per share one year later with anticipated growth rate of dividend of 6%. The company’s tax rate is 40%. TASK 1: using the above information help the financial controller to calculate: The cost of Debt financing after tax. The cost of Ordinary Share financing. The cost of Preference Shares financing.
Universal Manufacturing plans to issue long-term bonds to raise funds to support future expansion. The company has existing bonds outstanding that are similar to the new bonds it expects to issue. The existing bonds have a face value equal to $1,000, have a coupon rate of interest equal to 5 percent (semiannual payments), and mature in 14 years. These bonds are currently selling for $1,084 each. Universal’s marginal tax rate is 35 percent. (a) What should be the coupon rate on the new bond issue? (b) What is Universal’s after-tax cost of debt?
Inzaghi Company recently hired you as a consultant to estimate the company’s WACC. You have obtained the following information. (1) The company has noncallable bonds with $1,000 face value and coupon rate of 10% (paid semi-annually). The bonds mature in 4 years, and have current price of $1,140. (2) The company’s tax rate is 30%. (3) The current price of the company’s stock is $80.00 per share. Dividends are expected to grow at 5% indefinitely and the most recent dividend paid by the company was $2.75 per share. (4) The target capital structure of the company consists of 41.5% debt and the balance is common equity. (5) The company is not planning to issue any new common stock. What is Inzaghi Company’s WACC? ** You must explain your approach in writing in four lines. No credit is given without explanation.
Cts Ltd. is in the 30% tax bracket. It is interested in determining the minimum return that its stakeholders (investors) will accept. Since you have applied for an internship with them, they have assigned this task to you.To get started with your work, you compile some information as follows:1. Cts Ltd has 3000, 6% semi-annual coupon bonds outstanding. These bonds will mature in 12 years and they sell for 80% of their par value as of now.2. The firm is also partly equity financed. It has 100,000 outstanding common shares and 19,000 shares of preferred stock. The common shares command a market price of $55 per share and the beta of Cts Ltd stock is 1.20. Preference shares offer a 6% fixed dividend and sell for $110 per share.3. The risk-free rate is 4% and the market risk premium is 6% Compute: 1. The minimum required return by Cts Ltd's debtholders 2. The minimum required return by Cts Ltd's common shareholders3. The minimum required return by Cts Ltd's preferred shareholders4. The…
d c'z Quail Company had an investment in bonds purchased at par for P8,000,000. On December 31, 2018, the remaining life of the bonds is 3 years with an annual interest payment at 10% payable at the end of each year. The issuer was facing a tough economic environment and informed all of the investors that it will be unable to make all payments according to the contractual terms. The entity had projected the expected cash flow for this investment to be P1,000,000 on December 31, 2019, P2,000,000 on December 31, 2020 and P6,000,000 on December 31, 2021. The market rate of interest is 12% for 2018, In connection with your audit, how much is the interest income for the year ended December 31, 2019?

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