Bond Valuation: Zero Coupon, Premium, and Discount Bond Pricing
Problem 8: Bond Coupon Rate Calculation
To determine the annual coupon and coupon rate, we use the following financial calculator inputs and solve for the payment (PMT):
Financial Calculator Inputs (Problem 8)
- N: 10.5 × 2 = 21 (semiannual periods)
- I/Y: 6.2% / 2 = 3.1% (semiannual yield)
- PV: -$945 (present value, entered as negative)
- FV: $1,000 (face value)
- PMT: Solve for $27.40 (semiannual coupon payment)
Based on the semiannual payment, we can calculate the annual coupon and coupon rate:
- Annual coupon
WACC Calculation & Capital Budgeting Decisions
Weighted Average Cost of Capital (WACC) Applications
This document presents two case studies demonstrating the calculation of the Weighted Average Cost of Capital (WACC) and its application in capital budgeting decisions. Each case includes a problem statement, detailed calculations, and project acceptance criteria.
Case Study 1: Empire Electric Company (EEC)
Problem Statement: EEC WACC & Project Selection
Empire Electric Company (EEC) utilizes only debt and common equity in its capital structure.
Read MoreStock Valuation and Return Calculation Examples
Stock Valuation Problems
NU YU Dividend Valuation
NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $0.57 a share. The following dividends will be $0.62, $0.77, and $1.07 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.8 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 12 percent?
Calculation
Read MoreUnderstanding Key Financial Ratios
Economic Ratios Explained
Asset Turnover Ratios
Total Assets Turnover
Formula: Net Sales / Average Total Assets
Fixed Assets Turnover
Formula: Net Sales / Average Fixed Assets (PPE – Accumulated Amortization)
Current Assets Turnover
Formula: Net Sales / Average Current Assets
Sales Profitability Ratios
Gross Profit Margin
Formula: (Net Sales – Cost of Sales) / Net Sales
Operating Profit Margin
Formula: EBIT / Net Sales
Economic Profitability Ratios
Return on Assets (ROA)
Formula: EBIT / Average Total Assets
Return
Read MoreUnderstanding Bonds, Stocks, and Market Valuation
As time passes, interest rates change in the markets, which affects the present value of a bond. When interest rates increase, the present value of the bond decreases, and when interest rates fall, the bond is worth more. There is an inverse relationship between interest rates and bond prices.
Yield to Maturity (YTM) is the opportunity rate for bonds of similar characteristics, the interest rate required in the market on a bond, and the rate implied by the current bond price. The YTM represents the
Read MoreUnderstanding Liabilities and Equity: A Deep Dive
Liabilities and Equity
Current Liabilities
Current Liabilities: Accounts payable to suppliers, notes payable, various creditors, taxes payable, customer advances.
Long-Term Liabilities
Long-Term Liabilities: Loans payable (bank loans, bonds payable).
Types of Debts
- Accounts Payable to Suppliers: Generated by credit purchases of merchandise for sale or processing.
- Salaries Payable: Wages owed to employees.
- Utilities Payable: Unpaid water, electricity, and garbage collection services.
- Interest Payable: Accrued