Question

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

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