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Homework answers / question archive / Quantum Corporation has two different bonds currently outstanding
Quantum Corporation has two different bonds currently outstanding. Bond M has a face value of K20,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $800 every six months over the subsequent eight years, and finally pays $1,000 every six months over the last six years. Bond N also has a face value of $20,000 and a maturity of 20 years; it makes no coupon payments over the life of the bond. If the required return on both these bonds is 8 percent compounded semiannually, what is the current price of Bond M and Bond N? (14 marks) (ii) Why is the goal of financial management to maximize the current share price of the company's stock? In other words, why isn't the goal to maximize the future share price? (4 marks) (iii)Who owns a corporation? Describe the process whereby the owners control the firm's management. What is the main reason that an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise? (7 marks) Total (25 marks)
QUESTION TWO (a) Robert Chilufya's employer offers its workers a two-month paid sabbatical every seven years. Robert, who just started working for the firm, plans to spend his sabbatical touring Europe at an estimated cost of K25,000. To finance his trip. Robert plans to make six annual end-of-year deposits of K2,500 each, starting this year, into an investment account earning 4 percent interest semi-annually. Will Robert's account balance at the end of seven years be enough to pay for his trip? (8 marks) (i) Suppose Robert increases his annual contribution to K3,150. How large will his account balance be at the end of seven years? (7 marks) (b) Distinguish between systematic and unsystematic risk in relation to portfolio theory, (10 marks) Total (25 marks)
1)i)The price of bond M is the present value of cash flows discounted at the market rate of interest.
In the question given
Present value should be calculated as follows
Where n = 40 ( 20 years *2 )
20 years is multiplied by 2 because the cash flows are semi annually.
i = 4% (8%/2) as cash flows are semi annually the rate of interest should also be semi annually.
Hence the present value would be as follows
Therefore value of Bond M = 8952.10
2) Value of bond N
Where n = 40 ( same as mentioned above in calculation of bond m)
i = 4% same as above that of bond M
Value of Bond N = 20000PVIF (4%, 40)
Where PVIF stands for present value intrinsic factor
= 20000 * 0.2083
= 4166
Therefore value of bond N = 4166
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