10.11Tom Cruise Lines, Inc., issued bonds five years ago at $1,000 per bond.

These bonds had a 25-year life when issued and the annual interest payment was then 12 percent. This return was in line with the required returns by bondholders at that point as described below: Assume that five years later the inflation premium is only 3 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 20 years remaining until maturity. Compute the new price of the bond. Further analysis Solution: N = 20yrs Interest = 12% r= 12% Interest payment per period = 12% x1000 = $120 PVIF = n * 10% rate = 0.148644 PVIFA n* 10% rate = 8.513564 Price of bond = PVIFA *Interest payment + PVIF * Redemptive value PVIFA * Interest payment = 8.513564 * 120 = 1021.63 PVIF * Redemptive value = .148664* 1000 = 148.64 Total = $1170.27 = Bond Price

10. 19.Heather Smith is considering a bond investment in Locklear Airlines. The $1,000 par value bonds have a quoted annual interest rate of 9 percent and interest is paid semiannually. The yield to maturity on the bonds is 12 percent annual interest. There are 15 years to maturity. Compute the price of the bonds based on semiannual analysis. Principal = 1000 Interest = 9% = 1000X9%=$90 = $45 every six months Semiannual analysis = 15* 2 = 30 N=30 Interest rate = 12/6 = 6% PV from PVIFA table = 13.765 PV = 45* 13.765= 619.425 PV factor fro principal from table = 0.174 PV= 1000*.174 = $ 174 Therefore price of bond = 619.425+174= $793.425

10.26.Laser Optics will pay a common stock dividend of $1.60 at the end of the year (D1). The required rate of return on common stock (Ke) is 13 percent. The firm has a constant growth rate (g) of 7 percent. Compute the current price of the stock (P0).

Po = D1/(r g) = $1.60/(.13-0.07) = $26.67 11.4.Calculate the aftertax cost of debt under each of the following conditions. After tax cost of debt = Yield*(1-corporate tax rate) a) 6.0%*(1-16%)=5.04% b) 12.6%(1-35%)=8.19% c) 9.4%(1-24%)=7.144% 11.17.United Business Forms capital structure is as follows: The aftertax cost of debt is 7 percent, the cost of preferred stock is 10 percent, and the cost of common equity (in the form of retained earnings) is 13 percent. Calculate United Business Forms weighted average cost of capital in a manner similar to Table 11-1 on page 328. WEIGHTED AVERAGE COST OF CAPITAL 1 Weights Long Term Debts Common Stocks Preferred stock 0.350 0.500 0.150 2 Cost after tax 7.0% 13.0% 10.0% WACC= 1*2 2.45% 6.50% 1.50% 10.45%

11.20.Given the following information, calculate the weighted average cost of capital for Hamilton Corp. Line up the calculations in the order shown in Table 11-1. Percent of capital structure: Additional information:

Solution Kd = Yield (1 - T) = 11% (1 - 0.30) = 11% (.70) = 7.7%

bond yield of 11% Cost (after tax) 7.70% 10.81 13.00 Weights 30% 15 55 Weighted Cost 2.31% 1.62 7.70 11.63%

Debt Kd Preferred stock Kp Common equity Ke Weighted Average cost of Capital Ka