1. A company is planning to issue perpetual, callable bonds with a coupon rate of 4% paid annually, and a par value of $1,000.The nominal interest rate on these bonds will be 7% for the next year.In one year, the nominal rate on the bonds will be either 8% with probability 0.8, or 5% with probability 0.2.The bonds are callable at $1200.Assuming the bonds are called if the interest rate decreases, what is the price of the callable bond today?
2. An all-equity firm expects its EBIT to be $130,000 every year in perpetuity.The firm currently has a cost of equity of 14.5 percent.The tax rate is 23 percent.The firm plans to borrow $174,000 at a pretax rate of 9.6 percent and use the proceeds to repurchase shares.What will the firm's cost of equity be after the recapitalization?

Answer rating: 100% (QA)

To calculate the price of the callable bond today we need to discount the expected cash flows from t... View the full answer