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1)A $1,000 bond with a coupon rate of 5% paid semi-annually has 8 years to maturity and a yield to maturity of 9%
1)A $1,000 bond with a coupon rate of 5% paid semi-annually has 8 years to maturity and a yield to maturity of 9%. The price of the bond is closest to $________. Input your answer without the $ sign and round your answer to two decimal places.
2) Camille's Café is considering a project that will not produce any sales but will decrease cash expenses by $12,000. If the project is implemented, taxes will increase from $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is the amount of the operating cash flow using the top-down approach? (8 points)
Expert Solution
1)
Price of Bond = Present Value of the Future cash flows discounted at YTM or Yield To maturity.
Semiannual interest rate = 5%/2 = 2.5%
Semiannual interest received = $1000*2.5% = $25
Semiannual YTM = 9%/2 = 4.5% OR 0.045
| A | B | C | D= B+C | E | D*E | |
| Time (Semiannual) | Semiannual interest | Maturity Amount | Total Cash flow | Present value discounting Factor@4.5% |
Present value of cash flows(D*E) |
|
| 1 | $25 | $0 | $25 | 0.956937799 | 1/(1.045)^1 | $23.92 |
| 2 | $25 | $0 | $25 | 0.9157299512 | 1/(1.045)^2 | $22.89 |
| 3 | $25 | $0 | $25 | 0.8762966041 | 1/(1.045)^3 | $21.91 |
| 4 | $25 | $0 | $25 | 0.8385613436 | 1/(1.045)^4 | $20.96 |
| 5 | $25 | $0 | $25 | 0.8024510465 | 1/(1.045)^5 | $20.06 |
| 6 | $25 | $0 | $25 | 0.7678957383 | 1/(1.045)^6 | $19.20 |
| 7 | $25 | $0 | $25 | 0.7348284577 | 1/(1.045)^7 | $18.37 |
| 8 | $25 | $0 | $25 | 0.703185127 | 1/(1.045)^8 | $17.58 |
| 9 | $25 | $0 | $25 | 0.6729044277 | 1/(1.045)^9 | $16.82 |
| 10 | $25 | $0 | $25 | 0.643927682 | 1/(1.045)^10 | $16.10 |
| 11 | $25 | $0 | $25 | 0.6161987388 | 1/(1.045)^11 | $15.40 |
| 12 | $25 | $0 | $25 | 0.5896638649 | 1/(1.045)^12 | $14.74 |
| 13 | $25 | $0 | $25 | 0.564271641 | 1/(1.045)^13 | $14.11 |
| 14 | $25 | $0 | $25 | 0.5399728622 | 1/(1.045)^14 | $13.50 |
| 15 | $25 | $0 | $25 | 0.5167204423 | 1/(1.045)^15 | $12.92 |
| 16 | $25 | $1,000 | $1,025 | 0.4944693228 | 1/(1.045)^16 | $506.83 |
| Total | $775.32 |
The price of the bond is closest to $775.32
2)
The operating cash flow will be calculated through incremental figures in the Top Down Analysis using the following formulae:
Incremental EBIT - Incremental Tax Paid + Incremental Depreciation
12000 - 1500 + 1500
= $12000
However, the operating cash flow can be calculated accurately using the top down approach if the sales are affected by the investment.
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