Bonds and Leasing:
Problem 1:
(R company) bonds trade at 100 today. The bonds pay semiannual interest thatis paid on January 1 and july 1 . the coupon on the bond is 10 percent. How much will you pay for a )r) bond if today is
a. March 1.
b. October 1
c. July 1
d. August 15
Problem 2:
(B company) intend to issue callable, perpetual bonds. The bonds are Callable at $1,250. One-year interest rates are 12 percent. There is a 6-percent probability that long-term interest rates are 12 percent. There is a 60% probability that long-term interest rates one year from today will be 15%. With a 40%, probability lng term interest rate will be 8%. To simplify the firms accounting (B) would like to issue the bonds at par ($1,000.). What must the coupon on the bonds be for the (B) to be able to be able to sell them at par?
Problem 3: The CFO of CRA is considering whether or not to refinance the two currently outstanding corporate bonds of the firm. The first one is an 8% perpetual bond with a $1000 face value with $75 million outstanding. The second one is a 9% perpetual bond with the same face value with $87.5 million outstanding . the call premiums for the two bonds are 8.5% and 9.5% of the face value, respectively. The transaction costs of the refunding are $10 million and $12 million. Respectively. The current interest rate for the two bonds are 7% and 7.25% respectively . which bond should the CFO recommend be refinanced ? what is the NPV of the refunding ?
Problem 4: SSE firm is considering borrowing money at 11% and purchasing a machine that costs $350,000. The machine will be depreciated over 5 years by the streightline method and will be worthless in 5 years. SSE can lease the machine with the year-end payment of $94,200. The corporate tax rate is 35%. Should SSEbuy or lease?
Problem 5: RRC wants to expand its manufacturing facilities. LLC has offered RRC the opportunity to lease a machine for $100,000 for 5 years. The machine will be fully6 depreciated by the straight-line method. The corp. tax rate for RRc is 25%. While LLC tax rate is 35%. The appropriate before-tax interest rate is 8%. Assume lease payments occur at year end. What is RRC reservation price? What is LLC’s reservation price? What is the negotiating range of the lease?