Question

# 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

 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

#### Earn Coins

Coins can be redeemed for fabulous gifts.