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b. What would be the price if comparable debt yields 8 percent and the bond matures
after five years?
Price = $1,000 x 0.6806 + $1,000 x 6% x 3.9927
Price = $680.60 + $239.56
Price = $920.16
d. What are the current yields and the yields to maturity in a and b?
Current Yield:
a. $60 / $865.81 = 6.93%
b. $60 / $920.16 = 6.52%
2.
a. A $1,000 bond has a 7.5 percent coupon and matures after 10 years. If current interest
rates are 10 percent, what should be the price of the bond?
Price = $1,000 x 0.3855 + $1,000 x 7.5% x 6.1446
Price = $385.50 + $460.85
Price = $846.35
b. If after six years interest rates are still 10 percent, what should be the price of the
bond?
Price = $1,000 x 0.6830 + $1,000 x 7.5% x 3.1699
Price = $683 + $237.74
Price = $920.74
c. Even though interest rates did not change in a and b, why did the price of the bond
change
The price of the bond changed because certain time period passed.
d. Change the interest in a and b to 6 percent and rework your answers. Even though the
interest rate is 6 percent in both calculations, why are the bond prices different?
a.
Price = $1,000 x 0.5584 + $1,000 x 7.5% x 7.3601
Price = $558.40 + $552.01
Price = $1,110.41
b.
Price = $1,000 x 0.7921 + $1,000 x 7.5% x 3.4651
Price = $792.10 + $259.88
Price = $1,051.98
Bond prices are still different because the time period remains different.
4. Black stone, inc. has a five-year bond outstanding that pays $60 annually. The face
value of each bond is $1,000, and the bond sells for $890.
a. what will the holder receive when the bond matures? The principal of $1,000
b. If the current rate of interest on comparable debt is 12 percent, what should be the
price of this bond?
Price = $1,000 x 0.3220 + $1,000 x 8% x 5.6502
Price = $322 + $452.02
Price = $774.02
The firm should set aside $658,200.89 at the end of each year.
Chapter 19
3. The management of a firm wants to introduce a new product. The product will sell
for $4 a unit and can be produced by either of two scales of operation. In the first total
cost are
TC = $ 3,000 + 2.8Q.
In the second scale of operation, total costs are
TC = $ 5,000 + 2.4Q.
Second Scale:
Breakeven = $5,000 / ($4 $2.40)
Breakeven = $5,000 / $1.6
Breakeven = 3,125 units
b. What will be the firms profits for each scale of operation if sales reach 5,000 units?
First Scale:
Profit = ($4 x 5,000 units) [$3,000 + (2.8 x 5,000 units)]
Profit = $20,000 $17,000
Profit = $3,000
Second Scale:
Profit = ($4 x 5,000 units) [$5,000 + (2.4 x 5,000 units)]
Profit = $20,000 $17,000
Profit = $3,000
c. One half of the fixed costs are noncash (depreciation). All other expenses are for
cash. If sales are 2,000 units, will cash receipts cover cash expenses for each scale of
operation?
First Scale:
Total Cost (Cash) = $1,500 + ($2.8 x 2,000 units) = $7,100
Cash Sales = $4 x 2,000 units = $8,000
Yes; cash receipt can cover cash expenses
Second Scale:
Total Cost (Cash) = $2,500 + ($2.4 x 2,000 units) = $7,300
Cash Sales = $4 x 2,000 units = $8,000
Yes; cash receipt can cover cash expenses
If sales reach only 5,000 a year, was the correct scale of operation chosen?
Generally, yes. At 5,000 level of sales, neither scales of production is a wrong choice
as either of the two may be used because they will just yield the same profit.
3. A firm has the following total revenue and total cost schedules:
TR = $2Q.
TC = $4,000 + $1.5Q
4. The manufacturer of a product that has a variable cost of $2.50 per unit and total
fixed cost of $125,000 wants to determine the level of output necessary to avoid losses.
a. What level of sales is necessary to break even if the product is sold for $4.25?
Breakeven = $125,000 / ($4.25 $2.50)
Breakeven = $125,000 / $1.75
Breakeven = 71,429 units
What will be the manufacturers profit or loss on the sales of 100,000 units?
Profit = (100,000 units x $4.25) ($125,000 + (100,000 units x $2.50)
Profit = $425,000 375,000
Profit = $50,000
b. If fixed costs rise to $175,000, what is the new level of sales necessary to break
even?
Breakeven = $175,000 / ($4.25 $2.50)
Breakeven = $175,000 / $1.75
Breakeven = 100,000 units
c. If variable costs decline to $2.25 per unit, what is the new level of sales necessary to
break even?
Breakeven = $125,000 / ($4.25 $2.25)
Breakeven = $125,000 / $2.00
Breakeven = 62,500 units
d. If fixed costs were to increase to $175,000, while variable costs declined to $2.25
per unit, what is the new break-even level of sales?
Breakeven = $175,000 / ($4.25 $2.25)
Breakeven = $175,000 / $2.00
Breakeven = 87,500 units
Suppose $100,000 of the above fixed costs of $125,000 was depreciation expense, what
level of sales would be the cash break-even of sales?
Cash Breakeven = $25,000 / ($4.25 $2.50)
Cash Breakeven = $25,000 / $1.75
Cash Breakeven = 14,286 units