Bus 320 connect homework 5 (sep 2013)

Applied Software has $1,000 par value bonds outstanding at 20 percent interest. The bonds will mature in 15 years. Use Appendix B and Appendix D.

Compute the current price of the bonds if the present yield to maturity is (Round “PV Factor” to 3 decimal places, intermediate and final answers to 2 decimal places. Omit the “$” sign in your response):

Price of the
bond

  (a) 10 percent

$   

(2)

  K_e increases

(3)

  g increases

Speedy Delivery Systems can buy a piece of equipment that should provide an 6 percent return and can be financed at 3 percent with debt. The CEO likes earning more than the cost of debt, and he thinks this would be a good deal. The firm can also buy a machine that would yield a 13 percent return but would cost 15 percent to finance through common equity. Earning less than the cost of equity sounds bad to the CEO. Assume debt and common equity each represent 50 percent of the firm’s capital structure.

(a)

Compute the weighted average cost of capital. (Round your intermediate and final answers to 1 decimal place. Omit the “%” sign in your response.)

  Weighted average cost of capital

(2)

  K_e increases

(3)

  g increases

Speedy Delivery Systems can buy a piece of equipment that should provide an 6 percent return and can be financed at 3 percent with debt. The CEO likes earning more than the cost of debt, and he thinks this would be a good deal. The firm can also buy a machine that would yield a 13 percent return but would cost 15 percent to finance through common equity. Earning less than the cost of equity sounds bad to the CEO. Assume debt and common equity each represent 50 percent of the firm’s capital structure.

(a)

Compute the weighted average cost of capital. (Round your intermediate and final answers to 1 decimal place. Omit the “%” sign in your response.)

  Weighted average cost of capital

 on investment

 on investment

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