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a.
To calculate: The discount rate of Robinson Corporation.
Introduction:
Discount Rate:
A rate that is used for the calculation of the
a.
Answer to Problem 18P
The discount rate of Robinson Corporation is 7.53% and after rounding off to a whole number, the discount rate is 8%.
Explanation of Solution
Computation of the discount rate:
b.
To calculate: The PV of total outflows of Robinson Corporation.
Introduction:
Present value (PV):
The current value of an investment or an asset is termed as its present value. It is calculated by discounting the
b.
Answer to Problem 18P
The PV of total outflows of Robinson Corporation is $3,171,831.
Explanation of Solution
Computation of PV of total outflows:
Working Notes:
Calculation of net cost of underwriting expense on new issue:
Calculation of after-tax cost:
The calculation of the tax savings per year is as follows:
The calculation of current price of bond, that is, PV of future tax savings is shown below.
The formula used for the calculation of current price of bond, that is, PV of future tax savings is shown below.
c.
To calculate: The PV of total inflows of Robinson Corporation.
Introduction:
Present value:
The current value of an investment or an asset is termed as its present value. It is calculated by discounting the future value of the investment or asset.
c.
Answer to Problem 18P
The present value of total inflow of Robinson Corporation is $2,847,244.
Explanation of Solution
Calculation of the present value of total inflow:
Working Notes:
The calculation of the savings per year is as follows:
The calculation of PV of savings is shown below.
The formula used for the calculation of PV of savings is shown below.
Calculation of underwriting cost write off:
Calculation of PV of deferred future write off:
The calculation of current price of bond is shown below.
The formula used for the calculation of current price of bond is shown below.
d.
To calculate: The NPV of Robinson Corporation.
Introduction:
It is the difference between the PV (present value) of
d.
Answer to Problem 18P
The NPV of Robinson Corporation is ($324,478).
Explanation of Solution
Calculation of NPV:
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Chapter 16 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
- On July 1, Somers Inc. issued $300,000 of 10%, 10-year bonds when the market rate was 12%. The bonds paid interest semi-annually. A. Assuming the bonds sold at 64.55, what was the selling price of the bonds? B. Explain why the cash received from selling this bond is different from the $300,000 face value of the bond. Investors can earn a in other similar bonds so the bond sells at aarrow_forwardOriole Corp. issues bonds with a face value of $325 million that mature in 14 years. The bonds carry a 5.5% interest rate and are sold at 95.309 to yield 6.0%. They pay interest semi-annually. (a1) * Your answer is incorrect. Calculate the proceeds on issuance of the bonds. Proceeds on issuance of the bonds $ 309,642,250arrow_forwardOn July 1, Somers Inc. issued $300,000 of 12%, 10-year bonds when the market rate was 14%. The bonds paid interest semi-annually. A. Assuming the bonds sold at 59.55, what was the selling price of the bonds? $ B. Explain why the cash received from selling this bond is different from the $300,000 face value of the bond. Investors can earn a higher rate/lower rate? in other similar bonds so the bond sells at a Premium/discount?arrow_forward
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EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT