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Chapter 5: 11DQ (page 524)
How does the bond rating affect the interest rate paid by a corporation on its bonds?
Bond ratings impact the interest paid by a corporation in a specific manner. The interest rate determination is dependent upon the level of rating. High-rated bonds carry less interest and vice versa.
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What is the difference between the following yields: coupon rate, current yield, and yield to maturity? (LO16-2)
Question: The Robinson Corporation has $43 million of bonds outstanding that were issued at a coupon rate of 11戮 percent seven years ago. Interest rates have fallen to 10戮 percent. Mr. Brooks, the vice president of finance, does not expect rates to fall any further. The bonds have 17 years left to maturity, and Mr. Brooks would like to refund the bonds with a new issue of equal amount also having 17 years to maturity. The Robinson Corporation has a tax rate of 30 percent. The underwriting cost on the old issue was 2.4 percent of the total bond value. The underwriting cost on the new issue will be 1.7 percent of the total bond value. The original bond indenture contained a five-year protection against a call, with a 9 percent call premium starting in the sixth year and scheduled to decline by one-half percent each year thereafter. (Consider the bond to be seven years old for purposes of computing the premium.) Assume the discount rate is equal to the after-tax cost of new debt rounded up to the nearest whole number.
a. Compute the discount rate.
Why is the cumulative feature of preferred stock particularly important to preferred stockholders?
The Western Pipe Company has the following capital section in its balance sheet. Its stock is currently selling for \(6 per share.
Common stock (50,000 shares at \)2 par) | \(100,000 |
Capital in excess of par | \)100,000 |
Retained earnings | \(250,000 |
\)450,000 |
The firm intends to first declare a 15 percent stock dividend and then pay a 25-cent cash dividend (which also causes a reduction of retained earnings). Show the capital section of the balance sheet after the first transaction and then after the second transaction.
Discuss the reason for the differences between underwriting spreads for stocks and bonds.
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