2. Venture capital required rate of return. Red Devil Investors has a success ra

Question

2. Venture capital required rate of return. Red Devil Investors has a success rate of one project for every four funded. Red Devil has an average loan period of two years and requires a portfolio return of 24.6%. If you borrow from Red Devil, what is your annual cost of capital? NOTE: Show all work

10. Selling bonds. Lunar Vacations needs to raise $5,800,000 for its new project (a golf course on the moon). Astro Investment Bank will sell the bond for a commission of 2.4%. The market is currently yielding 7.7% on twenty-year semiannual bonds.   If Lunar wants to issue a 6.4% semiannual coupon bond, how many bonds will it need to sell to raise the $5,800,000? Assume that all bonds are issued at a par value of $1,000 NOTE: Show all work

12. Selling bonds. Rawlings needs to raise $36,400,000 million for its new manufacturing plant in Jamaica. Berkman Investment Bank will sell the bond for a commission of 2.1%. The market is currently yielding 7.6% on twenty-year zero-coupon bonds. If Rawlings wants to issue a zero-coupon bond, how many bonds will it need to sell to raise the $36,400,000? Assume that the bond is semiannual and issued at a par value of $1,000. NOTE: Show all work

17. Commercial paper. Criss-Cross Manufacturers will issue commercial paper for a short-term cash inflow. The paper is for ninety-one days and has a face value of $50.000, and the company anticipates it to sell at 95.6% of par value. Criss-Cross wants to raise $3,400,000. What is the cost of this borrowing (annual terms)? How may %u201Cpapers%u201D will it sell?    NOTE: Show all work

Explanation / Answer

2. Portfolio return per year = 24.6%/2 = 12.3%

As this needs to be covered by 1 out of the 4 companies lent to, so effective rate = 12.3%*4 = 49.2%

10. Total amount to be raised = 5,800,000 / (1-2.4%) = 5,942,623 (after accounting for Astro's cost)

Yield is 7.7%, semiannual coupon is 64/2 = 32, no of periods = 20*2 = 40

So current price can be calculated in Excel as =PV(7.7%/2,40,-32,-1000,0). This is equal to 868.42.

So number of bonds = 5,942,623 / 868.42 = 6842.993 bonds or rounding off, 6843 bonds

12. Total amount to be raised = 36,400,000 / (1-2.1%) = 37,180,797 (after accounting for Berkman's cost)

Yield is 7.6%/2=3.8%, coupon is 0, no of periods = 20*2=40

So current price of $1000 bond = 1000/(1+3.8%)^40 = 224.96

So number of bonds = 37,180,797 / 224.96 = 165,277.2 bonds or rounding off, 165,278 bonds

17. Yield for 91 days = (100-95.6) / 95.6 = 4.6%

So annual cost = (100-95.6) / 95.6 * 365/91 = 18.46%

Price per bond of $50 face value = 50*95.6% = $47.8

So number of papers = 3,400,000 / 47.8 = 71,129.71, or rounding off, 71,130 papers

Please let me know in case of any queries.

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