Acme Chemical, Inc. is a major manufacturer of chemical products for the agriculturalndustry, including pesticides, herbicides and other compounds. Due to a number of law suitselated to toxic wastes, Acme Chemical has recently experienced a market re-evaluation of itscommon stock. The firm also has a bond issue outstanding with 10 years to maturity and anannual coupon rate of 5 percent, with interest paid semi annually. The required nominal marketannual interest rate on this bond has now risen to 10 percent due to the high risk level associatedvith this firm. The bonds have a par or face value of $1,000.1. Label each of the variables that you would use to determine the value of this bond in themarket today:N (time periods until maturity)PMT (periodic interest payment)I per (periodic market interest rate)EV (future value to be received when the bond matures) =2. Based on the variables that you have identified in Question #1, what is the market value.today (the present value or PV) of one of Acme Chemical's bonds? aLabel each of the variables that you would use to determine the new value of this bondin the market:N (time periods until maturity)PMT (periodic interest payment)I per (periodic market interest rate)EV (future value to be received when the bond's mature) =b Based on the variables that you have identified in Question #3.a., what is the new marketvalue (the present value or PV) of one of Acme Chemical's bonds, following their victoryin appeals court?1. Why do you suppose that the market value of Acme Chemical's bonds has risen following thefirm's victory in appeals court?

Bonds Bonds are referred to as fixed-income instruments which show a loan made by an investor to a…

Answered: Acme Chemical, Inc. is a major…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 17P

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five years ago, Highland, Inc. issued a corporate bond with an annual coupon of $5,500, paid at the rate of $2,750 every six months, and a maturity of 14 years. The par (face) value of the bond is $1,000,000. Recently, however, the company has run into some financial difficulty and has restructured its obligations. Today's coupon payment has already been paid, but the remaining coupon payments will be postponed until maturity. The postponed payments will accrue interest at an annual rate of 6.5% per year and will be paid as a lump sum amount at maturity along with the face value. The discount rate on the renegotiated bonds, now considered much riskier, has gone from 8.5% prior to the renegotiations to 12.5% per annum with the announcement of the restructuring. What is the price at which the new renegotiated bond should be selling today? Recall that the compounding interval is 6 months and the YTM, like all interest rates, is reported on an annualized basis. (Enter just the number in…
Ten years ago, DEWA, an electricity and water authority, issued $20 million worth of municipal bonds that carried a coupon rate of 6% per year, payable semiannually. The bonds had a maturity date of 25 years. Due to a worldwide recession, interest rates dropped significantly enough for the utility to consider paying off the bonds early at a 10% penalty to the face value. DEWA would then reissue the bonds at the same face value (i.e., $20 million) for the remaining 15 years, but at a lower coupon rate of 2% per year, payable semiannually. What would be the semiannual rate of return to DEWA, if it proceeds with this plan?
In the year 2013, Cirrus Aircraft Limited, a private jet manufacturer decided to open a new production site In New Orland, which is connected to a testing and flying facility. The estimated cost to open the new facility was $126 million, out of which $30 million was generated by issuing 30,000, $1000 value bonds with a maturity period of 15 years. Those bonds were offering a coupon rate of 8%. The bonds were offered in NYSE on 1st January 2014 and were sold within early hours of that day. Currently, Financial markets of New York are paying an average return of 7.5% on stocks, 5% on preferred equity and 10% on debt, moreover, Current Yield to Maturity of the bond is 7.25%. Cirrus Aircraft sold 2400* Vision Jet SF50 G2 in 2020, which was above expectation and significantly increase the cash position of the company. Due to which, it was decided in the second board meeting of 2020 to retire as much debt as possible to reduce the interest payment burden on the company. But since, the bonds…
In the year 2013, Cirrus Aircraft Limited, a private jet manufacturer decided to open a new production sitein New Orland, which is connected to a testing and flying facility. The estimated cost to open the new facility was $126 million, out of which $30 million was generated by issuing 30,000, $1000 value bonds with a maturity period of 15 years. Those bonds were offering a coupon rate of 8%. The bonds were offered in NYSE on 1st January 2014 and were sold within early hours of that day. Currently, Financial markets of New York are paying an average return of 7.5% on stocks, 5% on preferred equity and 10% on debt, moreover, Current Yield to Maturity of the bond is 7.25%.Cirrus Aircraft sold 2400* Vision Jet SF50 G2 in 2020, which was above expectation and significantlyincrease the cash position of the company. Due to which, it was decided in the second board meeting of 2020 to retire as much debt as possible to reduce the interest payment burden on the company. But since, the bonds…
General Electric Capital, a division of General Electric, uses long-term debt extensively. In a recent year, GE Capital issued 11 billion in long-term debt to investors, then within days filed legal documents to prepare for another 50 billion long-term debt issue. As a result of the 50 billion filing, the price of the initial 11 billion offering declined (due to higher risk of more debt). Bill Gross, a manager of a bond investment fund, denounced a lack in candor related to GEs recent debt deal. It was the most recent and most egregious example of how bondholders are mistreated. Gross argued that GE was not forthright when GE Capital recently issued 11 billion in bonds, one of the largest issues ever from a U.S. corporation. What bothered Gross is that three days after the issue the company announced its intention to sell as much as 50 billion in additional debt, warrants, preferred stock, guarantees, letters of credit and promissory notes at some future date. In your opinion, did GE Capital act unethically by selling 11 billion of long-term debt without telling those investors that a few days later it would be filing documents to prepare for another 50 billion debt offering? Source: Jennifer Ablan, Gross Shakes the Bond Market; GE Calms It, a Bit, Barrons, March 25, 2002.
Kasey Hartman is the controller for Wholemart Company, which has numerous long-term investments in debt securities. Wholemart’s investments are mainly in five-year bonds. Hartman is preparing its year-end financial statements. In accounting for long-term debt securities, she knows that each long-term investment must be designated as a held-to-maturity or an available-for-sale security. Interest rates rose sharply this past year, causing the portfolio’s fair value to substantially decline. The company does not intend to hold the bonds for the entire five years. Hartman also earns a bonus each year, which is computed as a percent of net income. Required 1. Will Hartman’s bonus depend in any way on the classification of the debt securities? Explain. 2. What criteria must Hartman use to classify the securities as held-to-maturity or available-for-sale? 3. Is there likely any company oversight of Hartman’s classification of the securities? Explain.
Mullet Technologies is considering whether or not to refund a $75 million, 14% coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $6 million of flotation costs on the 14% bonds over the issue's 30-year life. Mullet's investment banks have indicated that the company could sell a new 25-year issue at an interest rate of 10% in today's market. Neither they nor Mullet's management anticipate that interest rates will fall below 10% any time soon, but there is a chance that rates will increase. A call premium of 8% would be required to retire the old bonds, and flotation costs on the new issue would amount to $4 million. Mullet's marginal federal-plus-state tax rate is 40%. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term government securities returning 6% annually during the interim period. Conduct a complete bond refunding analysis. What is the bond refunding's NPV? Do not round intermediate…
U.S. Delay Corporation, a subsidiary of the postal service, must decide whether to issue zero coupon bonds or quarterly payment bonds to fund construction of new facilities. The $1,000 par value quarterly payment bonds would sell at $795.54, have a 4.50% coupon rate, and mature in 10 years. At what price would the zero coupon bonds with a maturity of 10 years have to sell to earn the same effective annual rate (or bond yield) as the quarterly payment bonds?
XYZ Inc. is a company that is considering issuing bonds to finance the expansion of its activities. The managers thought about bonds with 10 or 15 years to maturity, with a coupon rate of 6%, paid semiannually. The face value of those bonds would be $1,000 and theywould expect those bonds to pay just as much as investors require, being sold at par at the issuance date. Suppose that an investor is interested in the company’s bonds, and they expect that the interest rates (YTM) are going to change immediately, decreasing by 2 percentage points compared to the YTM at issue. Which maturity bond would be better for this investor, the 10 or 15-year? What would be the dollar gain per bond with the expected immediate YTM change in each case?
Addison Manufacturing holds a large portfolio of debt securities as an investment. The fair value of the portfolio is greater than its original cost, even though some debt securities have decreased in value. Sam Beresford, the financial vice president, and Angie Nielson, the controller, are near year-end in the process of classifying for the first time this securities portfolio in accordance with GAAP. Beresford wants to classify those securities that have increased in value during the period as trading securities in order to increase net income this year. He wants to classify all the securities that have decreased in value as held-to-maturity. Nielson disagrees. She wants to classify those debt securities that have decreased in value as trading securities and those that have increased in value as held-to-maturity. She contends that the company is having a good earnings year and that recognizing the losses will help to smooth the income this year. As a result, the company will have…
Addison Manufacturing holds a large portfolio of debt securities as an investment. The fair value of the portfolio is greater than its original cost, even though some debt securities have decreased in value. Sam Beresford, the financial vice president, and Angie Nielson, the controller, are near year-end in the process of classifying for the first time this securities portfolio in accordance with GAAP. Beresford wants to classify those securities that have increased in value during the period as trading securities in order to increase net income this year. He wants to classify all the securities that have decreased in value as held-to-maturity. Nielson disagrees. She wants to classify those debt securities that have decreased in value as trading securities and those that have increased in value as held-to-maturity. She contends that the company is having a good earnings year and that recognizing the losses will help to smooth the income this year. As a result, the company will have…
Warsaw Manufacturing, Incorporated, plans to announce that it will issue $2.05 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 6 percent. The company is currently all-equity and worth $6.52 million with 188,000 shares of common stock outstanding. After the sale of the bonds, the company will maintain the new capital structure indefinitely. The annual pretax earnings of $1.29 million are expected to remain constant in perpetuity. The tax rate is 22 percent. a. What is the expected return on the company’s equity before the announcement of the debt issue? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the price per share of the company's equity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) d. What is the company’s stock price per share immediately after the…

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