Answer:
Bondholders have a degree of legal protection against default risk, but it is not comprehensive.
Explanation:
A bond can be defined as a debt or fixed investment security, in which a bondholder (investor or creditor) loans an amount of money to the bond issuer (government or corporations) for a specific period of time. The bond issuer are expected to return the principal (face value) at maturity with an agreed upon interest (coupon), which are paid at fixed intervals.
The par value of a bond is its face value and it comprises of its total dollar amount as well as its maturity value. Also, the par value of a bond gives the basis on which periodic interest is paid. Thus, a bond is issued at par value when the market rate of interest is the same as the contract rate of interest. This simply means that, a bond would be issued at par (face) value when the bond's stated rated is significantly equal to the effective or market interest rate on the specific date it was issued.
In Economics, bonds could either be issued at discount or premium. A bond that is being issued at a discount has its stated rate lower than the market interest rate, on the specific date of issuance while a bond that is issued at a premium, has its stated rate higher than the market interest rate on the specific date of issuance.
Default risk in bonds refer to the risk that a bond issuer (borrower) is unable to pay the principal or interest agreed upon in the contract with the bondholder (lender) in a timely manner.
Hence, the true statement about default risk is that bondholders have a degree of legal protection against default risk, but it is not comprehensive.
Answer:
c. $60,500
$12.10 per unit.
Explanation:
The variable cost is the one which varies with the number of units produced. Adens Corporation has incurred variable and fixed cost for its unit’s production. To identify per unit variable cost for Adens Corporation we add up all the variable cost per unit and then multiply by units sold in the period which are 5,000 units to get total variable cost.
Variable cost per unit = Direct Material per unit + Direct Labor per unit + Variable manufacturing overheads per unit + Sales Commission per unit + Variable administrative expense per unit.
Variable cost per unit = $6.25 + $2.80 + $1.55 + $1.00 + $0.50.
Variable cost per unit = $12.10
Total variable cost for 5,000 units = $12.10 *5000 unit.
= $60,500.
Answer:
WACC = 10.50 %
Explanation:
(‘1) Calculation of cost of debt- Cost of debt is nothing but yield to maturity of bond
Yield to maturity is nothing but the rate of return at which all future cash flows will become equal to current market price.
Current Market Price = PV of Coupon payments + PV of FV of bond
1040= 34 [ 1- (1+0.5 YTM)-2 x 30 / 0.5 YTM] + 1000 / ( 1+0.5 YTM )2 x30
YTM = 6.5 %
So cost of debt Rd = 6.5 %
(‘2) Cost of Preferred stock
Rps = Dps / Price
Rps = 5/78 = 6.41 %
(3) Cost of Common Stock
Rs = Risk Free rate + Beta x Market Risk Premium
Rs = 4.80 + 1.14 x 7
Rs = 12.78 %
4. Check the image attached.
WACC = 10.50 %
WACC= Wd x Rd x ( 1- Tax rate) + Wps x Rps + WCE x Rs
Post Tax Debt cost will be considered in WACC
Post Tax cost of debt= Cost x ( 1- Tax Rate )
Post Tax Cost = 6.5 x ( 1-0.38) = 4.03 %
Answer:
$29.70
Explanation:
Retention ratio = 1 - payout ratio
= ( 1 -0.5 )
= 0.5
Growth rate, g = ROE × Retention ratio
= 0.15 × 0.5
= 0.075
= 7.5%
Required return = Risk - free rate + [ Beta × (Market rate- risk-free rate) ]
= 2.5% + 1.44 × (11% - 2.5%)
= 14.74%
Intrinsic value =
=
= 29.69 ≈ $29.70