Acme Chemical, Inc. is a major manufacturer of chemical products for the agricul

Question

Acme Chemical, Inc. is a major manufacturer of chemical products for the agricultural industry, including pesticides, herbicides and other compounds. Due to a number of law suits related to toxic wastes, Acme Chemical has recently experienced a market re-evaluation of its common stock. The firm also has a bond issue outstanding with 10 years to maturity and an annual coupon rate of 5 percent, with interest paid semi annually. The required nominal market annual interest rate on this bond has now risen to 10 percent due to the high risk level associated with 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 the

market today:

N (time periods until maturity) =

PMT (periodic interest payment) =

I per (periodic market interest rate) =

FV (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

Explanation / Answer

1>Time to Maturity in Years 10 Interest Payment=0.05*1000/2 25 FV of bond when matures 1000 2>Market Value=PV of annuity 25 for 20 instalments with Interest@5% + PV of 1000 received on 20th instalment =12.4622*25+1000/(1.05^20) 688.44 3>Market Value=PV of annuity 25 for 10 instalments with Interest@3% + PV of 1000 received on 10th instalment =8.5302*25+1000/(1.03^10) 957.35 Market Value increased as the discount rate is low@6% instead of 10%

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