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olga_2 [115]
3 years ago
15

Tropical Resort, Inc.'s bonds currently sell for $1,350 and have a par value of $1,000. They pay an 11% coupon rate with interes

t paid semi–annually, and have a 15-year maturity, but they can be called in 7 years at $1,125. What is their yield to call (YTC)?
Business
1 answer:
IRINA_888 [86]3 years ago
4 0

Answer:

Their yield to call is 8.672%

Explanation:

The rate of return bondholders receives on a callable bond until the call date is called Yield to call.

Use following formula to calculate the yield to call

Yield to Call = [ C + ( F - P ) / n ] / [ (F + P ) / 2 ]

Where

C = Coupon Payment = $1,000 x 11% x 6/12 = $55

F = Face value = $1,000

P = Call price = $1,125

n -= number of periods to call = 7 years x 2 = 14 periods

Yield to Call = [ $55 + ( $1,000 - $1,125 ) / 14 ] / [ ( $1,000 + $1,125 ) / 2 ]

Yield to Call = 46.07 / $1,062

Yield to Call = 0.04336

Yield to Call = 4.336% semiannually

Yield to Call = 4.336% x 2

Yield to Call = 8.672% annually

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Answer:

1. Net present value of Project A = -41,449.96

2. Net present value of Project B = $143,746.85

3. I would recommend that company accept Project B.

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Note: This question is not complete as the requirement are omitted. The requirements are therefore provided to complete the question before answering it as follows:

Perit Industries has $135,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are:

                                                                       Project A           Project B

Cost of equipment required                         $ 135,000                $ 0

Working capital investment required                 $ 0               $ 135,000

Annual cash inflows                                       $ 25,000           $ 63,000

Salvage value of equipment in six years        $ 9,800                $ 0

Life of the project 6 years 6 years

The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries’ discount rate is 17%.

Required:

1. Compute the net present value of Project A. (Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount.)

2. Compute the net present value of Project B. (Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount.)

3. Which investment alternative (if either) would you recommend that the company accept?

The explanation of the answers is now provided as follows:

1. Compute the net present value of Project A. (Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount.)

Cost of equipment required = $135,000

Using the formula for calculating the present value of an ordinary annuity, the present value (PV) of the annual cash inflows can be calculated as follows:

PV of annual cash inflow = Annual cash inflow * (1 - (1 / (1 + discount rate))^Project life) / discount rate) = $25,000 * ((1 - (1 / (1 + 0.17))^6) / 0.17) = $89,729.62

The present value (PV) of the salvage value can be calculated as follows:

PV of salvage value = Salvage value / (1 + + discount rate)^Project life = $9,800 / (1 + 0.17)^6 = $3,820.42

Net present value of Project A = PV of annual cash inflow + PV of salvage value - Cost of equipment required = $89,729.62 + $3,820.42 - $135,000 = -41,449.96

2. Compute the net present value of Project B. (Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount.)

Working capital investment required = $135,000

Using the formula for calculating the present value of an ordinary annuity, the present value (PV) of the annual cash inflows can be calculated as follows:

PV of annual cash inflow = Annual cash inflow * (1 - (1 / (1 + discount rate))^Project life) / discount rate) = $63,000 * ((1 - (1 / (1 + 0.17))^6) / 0.17) = $226,118.64

The present value (PV) of the Working capital investment required can be calculated as follows:

PV of Working capital investment required = Working capital investment required / (1 + + discount rate)^Project life = $135,000 / (1 + 0.17)^6 = $52,628.21

Net present value of Project B = PV of annual cash inflow + PV of Working capital investment required - Working capital investment required = = $226,118.64 + $52,628.21 - $135,000 = $143,746.85

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Net present value of Project A = -41,449.96

Net present value of Project B = $143,746.85

Since the Net present value of Project A is negative, it should be rejected.

Since the Net present value of Project B is positive, it should be accepted.

Therefore, I would recommend that company accept Project B.

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