17. Project Evaluation. Ilana Industries Inc. needs a new lathe. It can buy a new high-speed lathe for $1 million. The lathe will cost $35,000 per year to run, but it will save the firm $125,000 in labor costs and will be useful for 10 years. Suppose that, for tax purposes, the latheis entitled to 100% bonus depreciation. At the end of the 10 years, the lathe can be sold for $100,000. The discount rate is 8%, and the corporate tax rate is 21%. What is the NPV of buying the new lathe?
1. 1. Financial Pages. Turn back to Table 6.1.(LO6-1)
a. What is the current yield of the 4.75% 2041 maturity bond? What is its yield to maturity?
b. “The current yield is less than the yield to maturity whenever the bond price is greater than the face value.” True or false?
2. Bond Yields. A 30-year Treasury bond is issued with face value of $1,000, paying interest of $60 per year. If market yields increase shortly after the T-bond is issued, what happens to the bond’s: (LO6-1)
a. coupon rate?
c. yield to maturity?
d. current yield?
3. Bond Yields. If a bond with face value of $1,000 and a coupon rate of 8% is selling at a price of $970, is the bond’s yield to maturity more or less than 8%? (LO6-1)
5. Bond Pricing. A General Power bond carries a coupon rate of 8%, has 9 years until maturity, and sells at a yield to maturity of 7%. (Assume annual interest payments.) (LO6-1 and LO6-2)
a. What interest payments do bondholders receive each year?
b. At what price does the bond sell?
c. What will happen to the bond price if the yield to maturity falls to 6%?
d. If the yield to maturity falls to 6%, will the current yield be less, or more, than the yield to maturity?
6. Bond Yields. A bond has 8 years until maturity, has a coupon rate of 8%, and sells for $1,100. (LO6-1 and LO6-2)
a. What is the current yield on the bond?
b. What is the yield to maturity if interest is paid once a year?
c. What is the yield to maturity if interest is paid semiannually