Question

4. Deter nine the market price of a $750,000, five-year, 12% (pays interest semiannually) bond issue sold to yield an effective rate of 10%. 5. Jill Morris is presently leasing a small business computer from Eller Office Equipment Company. The lease requires 10 annual payments of $6,000 at the beginning of each year and provides the lessor (Eller) with an 8% return on its investment. Assuming the computer has a ten-year life and will have no salvage value at the expiration of the lease, what was the original cost of the computer to Eller? 6. Carey Company owns a plot of land on which buried toxic wastes have been discovered. Since it will require several years and a considerable sum of money before the property is fully detoxified and capable of generating revenues, Carey wishes to sell the land now. It has located two potential buyers: Buyer A, who is willing to pay $700,000 for the land now, and Buyer B, who is willing to make 20 annual payments of $110,000 each. Assuming that the appropriate rate of interest is 10%, to whom should Carey sell the land? Show calculations.

Answer 1

Question No : 1

First we need to fid out the interest

Interest is calculated by multiplying face value of bond with interest rate.As the interest is paid semi annually we take the half of the rate,as below

Interest = 75000 * 6/100 = 4500

Present Value of Interest and Dollar  are  required for the computing the market value

(a) Present Value of Interest

As the current market rate is 10,we will take the half ,ie 5 because interest pays semi annually. Using these figures the present value of  the annuity factor is 7.7217

Present value of Interst payments = interest amount * annuity factor

= 4500 * 7.7217

= 34747.65

(b) Present Value of one dollar

Using the present value of $1 table we will get 0.6139 as the interest rate taken as 5% (semiannually)

Market Price =(face value of bond * present value of bond) + Interest

= (75000 *0 .6139) + 34747.65

= 46042.5 + 34747.65

= 80790.15

Question 2

All the expenses incurred to acquire the computer should be added to the cost of the computer.

Here ,an annual payment $6000 paid for 10 years = 6000*10 = $ 60000

Interst @ 8 % = 60000*8% = $ 4800

As this amount is received from the lessor it can be deducted from the amount paid

ie, 60000-4800 =$ 55200

Question 3

First we will calculate the future value received from Buyer B

Amount received in 20 installments = 110000 * 20 = 2200000

Future Value = Amount received * future rate

= 2200000 * 1.1^10

= $ 56,98,000

it would be better to sell the land to Buyer B