The Value of Money, Bonds and Stocks

  1. The company you work for is looking to expand. As the CFO, you’re tasked with comparing the cost of buying manufacturing equipment now, at a $250,000 dis- count from its original price of $1,650,000 and storing it for a year, or waiting one year to buy it. The cost of buying the equipment includes the supplier’s bill and the cost to store the item, for a total of $1,464,000. What interest rate is implied by a $1,464,000 cash ow today, versus $1,650,000 in a year? When it comes to obtaining the cash for the purchase of the equipment, what is your recommendation on whether the company should purchase the equipment now or wait a year?

 

  1. Worldwide Widget Manufacturing, Inc., decided to go ahead with its plan to expand. It issued $30 million in debt due in 30 years to nance the expansion at an 8 percent coupon rate. The company makes interest-only, semiannual pay- ments of $1,200,000 on this debt. Debt issued today would cost only 7 percent interest. You have been asked to determine whether the company should issue new debt (for 25 years) to pay off the old debt. If the company does so, it will have to pay $1.7 million as a “call premium” to the existing debt holders, and also $1.4 million to its investment bankers to oat the issue. If the new debt was issued, what would be the semiannual interest payment savings or cost? What is the cost to re nance the debt? What would be the present value of the semiannual savings in interest payments over the life of the debt? Should you advise the company to replace the old debt with new debt? Why?

 

  1. Worldwide Widget Manufacturing, Inc., is doing so well it decides it’s time to become an international company. As the chief nancial of cer (CFO), you’re tasked with raising $340 million of new capital to open of ces around the world. In researching the matter, you learn that if bonds due in 20 years are used for raising the capital, they’ll be rated AA and will need to offer a yield of 6.5 percent. How many bonds will it be necessary to issue to raise the needed capital? What will Worldwide Widget Manufacturing have to make as a semiannual interest rate payment?

 

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