ABC Corporation has decided to sell ₱1000 bonds which will pay semiannual dividends of ₱20 (2% per period) and will mature in 5 years. The bonds are sold at ₱830, but after brokers' fees and other expenses the company ends up receiving ₱760. What is the company's cost of the capital raised through the sale of these bonds?
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
1. ABC Corporation has decided to sell ₱1000 bonds which will pay semiannual
dividends of ₱20 (2% per period) and will mature in 5 years. The bonds are sold at
₱830, but after brokers' fees and other expenses the company ends up receiving ₱760.
What is the company's cost of the capital raised through the sale of these bonds?
2. ABC Corporation has decided to sell ₱1000 bonds which will pay semiannual
dividends of ₱20 (2% per period) and will mature in 5 years. The bonds are sold at
₱830, but after brokers' fees and other expenses the company ends up receiving ₱760.
Is the bond a good buy for an investor who expects a 9% return on his investments?
3. A student deposits ₱1,000 in a savings account that pays interest at the rate of 6%
per year compounded annually. If all the money is allowed to accumulate, how much
money will the student have after 12 years?
4. A certain sum of money will be deposited in a savings account that pays interest at
the rate of 6% per year compounded annually. If all the money is allowed to accumulate,
how much must be deposited initially so that ₱5000 will have accumulated after 10
years?
5. A student plans to deposit ₱600 each year in a savings account, over a period of 10
years. If the bank pays 6% per year compounded annually, how much money will have
accumulated at the end of the 10-year period?
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