$   

  (b) Secured debt

  (c) Subordinate debenture

The Florida Investment Fund buys 50 bonds of the Gator Corporation through a broker. The bonds pay 6 percent annual interest. The yield to maturity (market rate of interest) is 8 percent. The bonds have a 15-year maturity. Use Appendix B and Appendix D. Using an assumption of semiannual interest payments:

(a)

Compute the price of a bond. (Round “PV Factor” to 3 decimal places and final answer to 2 decimal places. Omit the “$” sign in your response.)

  Price of the bond

$ 

[removed] %  

(d)

Although the same dollar amounts are involved in part b and c, why the percentage gain is larger than the percentage loss.

The Bowman Corporation has a $27 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 11 percent, the interest rates on similar issues have declined to 9 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is an 7 percent call premium on the old issue. The underwriting cost on the new $27,000,000 issue is $620,000, and the underwriting cost on the old issue was $470,000. The company is in a 30 percent tax bracket, and it will use a 9 percent discount rate (rounded after-tax cost of debt) to analyze the refunding decision. Use Appendix D.

(a)

Calculate the present value of total outflows. (Round “PV Factor” to 3 decimal places, intermediate and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

  Total outflows

$ [removed]  

(b)

Calculate the present value of total inflows.(Round “PV Factor” to 3 decimal places, intermediate and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

  Total inflows

$ [removed]  

(c)

Calculate the net present value. (Round “PV Factor” to 3 decimal places, intermediate and final answer to the nearest dollar amount. Negative amount should be indicated by a minus sign.Omit the “$” sign in your response.)

  Net present value

$ [removed]  

(d)

Should the old issue be refunded with new debt?

The Robinson Corporation has $64 million of bonds outstanding that were issued at a coupon rate of 8 3/4 percent seven years ago. Interest rates have fallen to 7 3/4 percent. Mr. Brooks, the vice-president of finance, does not expect rates to fall any further. The bonds have 16 years left to maturity, and Mr. Brooks would like to refund the bonds with a new issue of equal amount also having 16 years to maturity. The Robinson Corporation has a tax rate of 30 percent. The underwriting cost on the old issue was 3 percent of the total bond value. The underwriting cost on the new issue will be 2.3 percent of the total bond value. The original bond indenture contained a five-year protection against a call, with a 8.5 percent call premium starting in the sixth year and scheduled to decline by one-half percent each year thereafter. (Consider the bond to be 7 years old for purposes of computing the premium). Assume the discount rate is equal to the aftertax cost of new debt rounded to the nearest whole number.

What would be the aftertax cost of the call premium at the end of year 10 (in dollar value)? (Omit the “$” sign in your response.)

  Aftertax cost of the call premium

$ [removed]  

The Deluxe Corporation has just signed a 192-month lease on an asset with a 21-year life. The minimum lease payments are $1,500 per month ($18,000 per year) and are to be discounted back to the present at a 11 percent annual discount rate. The estimated fair value of the property is $175,000. Use Appendix D.

(a)

Calculate the lease period as a percentage to the estimated life of the leased property. (Round your answer to the nearest whole percent. Omit the “%” sign in your response.)

  Lease period

[removed] %  

(b)

Calculate the present value of lease payments as a percentage to the fair value of the property. (Round “PV Factor” to 3 decimal places. Round your intermediate and final answer to 1 decimal place. Omit the “%” sign in your response.)

  Present value of lease payments

[removed] %  

(c)

Should the lease be recorded as a capital lease or an operating lease?

The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease obligations in the balance sheet, which appeared as follows: Use Appendix D.

In $ millions

In $ millions

  Current assets

$

50  

  Current liabilities

$

15  

  Fixed assets

50  

  Long-term liabilities

25  

      Total liabilities

$

40  

  Stockholders’ equity

60  

  Total assets

$

100  

  Total liabilities and
    stockholders’ equity

$

100  

The footnotes stated that the company had $20 million in annual capital lease obligations for the next 15 years.

(a)

Discount these annual lease obligations back to the present at a 9 percent discount rate. (Enter your answers in millions rounded to nearest whole number. Round “PV Factor” to 3 decimal places. Omit the “$” sign in your response.)

  Annual lease obligations

$ [removed]  million  

(b)

Construct a revised balance sheet that includes lease obligations. (Enter your answers in millions rounded to nearest whole number. Round “PV Factor” to 3 decimal places. Omit the “$” sign in your response.)

Balance Sheet (in millions)

  Current assets

$ [removed]  

  Current liabilities

$ [removed]  

  Fixed assets

[removed]  

  Long-term liabilities

[removed]  

  Leased property
   under capital lease

[removed]  

  Obligations under
    capital lease

[removed]  

      Total liabilities

[removed]  

  Stockholders’ equity

[removed]  

  Total assets

$ [removed]  

  Total liabilities and
   Stockholders’ equity

$ [removed]  

(c)

Compute total debt to total assets on the original and revised balance sheets. (Round your answer to 1 decimal place. Omit the “%” sign in your response.)

  Original

[removed] %  

  Revised

[removed] %  

(d)

Compute total debt to equity on the original and revised balance sheets. (Round your answer to 1 decimal place. Omit the “%” sign in your response.)

  Original

[removed] %  

  Revised

[removed] %  

The Hardaway Corporation plans to lease a $750,000 asset to the O’Neil Corporation. The lease will be for 12 years. Use Appendix D.

(a)

If the Hardaway Corporation desires a 14 percent return on its investment, how much should the lease payments be? (Round “PV Factor” to 3 decimal places. Round your answer to the nearest dollar amount. Omit the “$” sign in your response.)

  Lease payment

$ [removed]  

(b)

The Hardaway Corporation is able to take a 10 percent deduction from the purchase price of $750,000 and will pass the benefits along to the O’Neil Corporation in the form of lower lease payments, (related to the Hardaway Corporation in the form of lower initial net cost), how much should the revised lease payments be? The Hardaway Corporation desires a 14 percent return on the 12-year lease. (Round “PV Factor” to 3 decimal places. Round your answer to the nearest dollar amount. Omit the “$” sign in your response.)

  Revised lease payment

$ [removed]