11. The firm\'s $1,000 bonds bear a 5% annual coupon rate paid annually. The bon
ID: 2800605 • Letter: 1
Question
11. The firm's $1,000 bonds bear a 5% annual coupon rate paid annually. The bond matures in 5 years. The bonds are currently selling at 90. No flotation cost will apply to the bonds if new bonds are issued. What is the cost of capital for the firm's bonds?
a. 9.2%
b. 7.50%
c. 4.50%
d. 6.00%
e. None of the answers provided is correct
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Aurora, Inc., a manufacturer of required accessories for all princesses is in the 40% tax bracket and exhibits the following balance sheet: Cash Accounts Receivable Inventory Net Plant, Property and Equipment $ 2,000 3,000 500,000 1000.000 $1,505,000 Total Assets Accounts Payable Accrued Wages Bonds S 1,000 2,000 650,000 S 653,000 Total Debt Preferred Stock Common Stock Retained Earnings S 50,000 502,000 300,000 $ 852,000 Total Equity Total Debt and Equity $1,505,000Explanation / Answer
1 Face value (FV) $ 1,000 2 Coupon rate 5.00% 3 Number of compounding periods per year 1 1*2/3 Interest per period (PMT) $ 50.00 Bond price (PV) $ (900.00) 4 Number of years to maturity 5 5 = 4*3 Number of compounding periods till maturity (NPER) 5 Bond yield to maturity RATE(NPER,PMT,PV,FV) Bond yield to maturity 7.50% (Pre-tax cost of debt)
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