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 | |||
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