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Ocean Adventures issues bonds due in 10 years with a stated interest rate of 6% and...

Ocean Adventures issues bonds due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 5%. Using a financial calculator or Excel, what is the issue price of the bonds?

Multiple Choice

  • $464,469.

  • $537,194.

  • $500,000.

  • $538,973.

  • Red Corp. has a rate of return on assets of 10% and a debt to equity ratio of 2 to 1. Not including any indirect effects on earnings, the immediate impact of retiring debt on these ratios is a(n):

    Return on Assets Debt to Equity
    a. increase increase
    b. decrease decrease
    c. increase decrease
    d. decrease increase

    Multiple Choice

  • Option C

  • Option B

  • Option A

  • Option D

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Answer #1
Table values are based on:
Face Amount $5,00,000
Interest Payment 500000*6%*6/12 =$15,000
Market Interest rate per period 2.50%
Cash Flow Table Value(PV of 2.5% for 20 period) Amount Present Value
PV of Interest 15.58916 $15,000 $2,33,837
PV of Principal 0.61027 $5,00,000 $3,05,135
PV of Bonds Payable(Issue Price) $5,38,972
So Option B is answer
If the debts are retired then it means that the debts have been reduced resulting into a decrease in debt equity ratio and increase in Return on Assets as the retirement of Debt will result
into outflow of cash.
So Option C is answer which is Increase in ROA and Decraese in DE ratio
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