1. Riverhawk Corporation has a bond outstanding with a market price of $1,250.00
ID: 2754901 • Letter: 1
Question
1. Riverhawk Corporation has a bond outstanding with a market price of $1,250.00. The bond has 10 years to maturity, pays interest semiannually, and has a yield to maturity of 9%. What is the bond’s coupon rate?
2. Last year, Jen and Berry Inc. had sales of $50,000, cost of goods sold (COGS) of 12,000, depreciation charge of $3,000 and selling, general and administrative (SG&A) cost of $10,000. The interest costs were $2,500. Tewnty-five percent of SG&A costs are fixed costs. If its sales are expected to be $60,000 this year, what will be the estimated SG&A costs this year?
Explanation / Answer
1) MArket Price = $1250
Years to MAturity = 10x 2 = 20 (semi annual interest)
YTM = 9%
Face VAlue of bond $1000
COupon RATe
PV of Principle = face value/(1+YTM)^n
PV of Principle = 1000/(1+0.09)^20 = $178.43
MArket VAlue of BOnd = PV Coupon+FAce value/(1+YTM)^n
PV coupon = PB - FAce Value /(1+YTM)n
PVC = 1250-1000/(1+0.09)^20 = 1250-178.43 = 1071.57
Coupon = (PVCx YTM)/[1-(1/(1+ytm)^n)]
Coupon = (1071.57x9%)/ [1-(1/(1+0.09)^20)]
Coupon = 96.44/0.822 = $117.32
Coupon rate = 100x coupon/face value
Coupon rate = 100x117.32/1000 = 11.73%
2) The Estimated SG&A cost would be 10000x25% = 2500 fixed
The Sales from the Precious year has increased by 0.83% =50000/60000*100 = 0.83%
So SG&A cost will also increase in the same proportion=10000x0.833 =8330 = 18330
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