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Chapter 5: 10DQ (page 524)

What is the difference between the following yields: coupon rate, current yield, and yield to maturity? (LO16-2)

Short Answer

Expert verified

The coupon rate states the interest amount divided by the bond’s par value.

The current yield states the interest amount divided by the current price.

The yield to maturity states the total payment due to a bondholder, including principal and interest.

Step by step solution

01

Bonds

Bonds are one of the sources of fundsfor the corporations that facilitate the business to function its operations smoothly. Long-term and short-term bonds are two major types of bonds.

02

The difference between various yields

  • Coupon rate: The coupon rate states the interest payment divided by the bond’s par value.
  • Current yield: The current yield states the interest payment divided by the bond’s current price.
  • Yield to maturity: The yield to maturity is the interest rate that will equate future interest payments and the payment at maturity (principal payment) to the current market price.

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Most popular questions from this chapter

Question: The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders’ claims are also shown.

Assets

Book value

Liquidation value

Accounts receivables

\(1,400,000

\)1,200,000

Inventory

\(1,800,000

\)900,000

Machinery and equipment

\(1,100,000

\)600,000

Building and plant

\(4,200,000

\)2,500,000

Total assets

\(8,500,000

\)5,200,000

Liabilities and stockholder’s claims

Liabilities

Accounts payable

\(2,800,000

First lien, secured by machinery and equipment

\)900,000

Senior unsecured debt

\(2,200,000

Subordinated debenture

\)1,700,000

Total liabilities

\(7,600,000

Stockholder’s claims

Preferred stock

\)250,000

Common stock

\(650,000

Total stockholder’s claims

\)900,000

Total liabilities and stockholder’s claims

$8,500,000

d. After the machinery and equipment are sold to partially cover the first lien secured claim, how much will be available from the remaining asset liquidation values to cover unsatisfied secured claims and unsecured debt?

Kevin’s Bacon Company Inc. has earnings of \(9 million with 2,100,000 shares outstanding before a public distribution. Seven hundred thousand shares will be included in the sale, of which 400,000 are new corporate shares, and 300,000 are shares currently owned by Ann Fry, the founder and CEO. The 300,000 shares that Ann is selling are referred to as a secondary offering, and all proceeds will go to her.

The net price from the offering will be \)16.50, and the corporate proceeds are expected to produce $1.8 million in corporate earnings.

a. What were the corporation’s earnings per share before the offering?

b. What are the corporation’s earnings per share expected to be after the offering?

The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders’ claims are also shown.

Assets

Book value

Liquidation value

Accounts receivables

\(1,400,000

\)1,200,000

Inventory

\(1,800,000

\)900,000

Machinery and equipment

\(1,100,000

\)600,000

Building and plant

\(4,200,000

\)2,500,000

Total assets

\(8,500,000

\)5,200,000

Liabilities and stockholder’s claims

Liabilities

Accounts payable

\(2,800,000

First lien, secured by machinery and equipment

\)900,000

Senior unsecured debt

\(2,200,000

Subordinated debenture

\)1,700,000

Total liabilities

\(7,600,000

Stockholder’s claims

Preferred stock

\)250,000

Common stock

\(650,000

Total stockholder’s claims

\)900,000

Total liabilities and stockholder’s claims

$8,500,000

d. After the machinery and equipment are sold to partially cover the first lien secured claim, how much will be available from the remaining asset liquidation values to cover unsatisfied secured claims and unsecured debt?

The Presley Corporation is about to go public. It currently has after-tax earnings of \(7,200,000, and 2,100,000 shares are owned by the present stockholders (the Presley family). The new public issue will represent 800,000 new shares. The new shares will be priced to the public at \)25 per share, with a 5 percent spread on the offering price. There will also be $260,000 in out-of-pocket costs to the corporation.

a. Compute the net proceeds to the Presley Corporation.

Solar Energy Corp. has $4million in earnings with 4 million shares outstanding. Investment bankers think the stock can justify P/E ratio of 21. Assume the underwriting spread is 5 percent. What should the price to the public be?

See all solutions

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