Part A: Cost of Debt
Kenny Enterprises has just issued a bond with a par value of $1,000, twenty years to maturity, and an 8% coupon rate with semiannual payments.
- What is the cost of debt for Kenny Enterprises if the bond sells at the following prices?
- What do you notice about the price and the cost of debt?
Part B: Comparing NPV and IRR
Chandler and Joey were having a discussion about which financial model to use for their new business. Chandler supports NPV and Joey supports IRR. The discussion starts to get heated when Ross steps in and states, “Gentlemen, it doesn’t matter which method we choose, they give the same answer on all projects.”
- Is Ross correct?
- Under what three (3) conditions will IRR and NPV be consistent when accepting or rejecting projects?
Part C: Production Cash Outflow
The Creative Products Corporation produces its products two months in advance of anticipated sales and ships to warehouse centers the month before sale. The inventory safety stock is 15% of the anticipated month’s sale. Beginning inventory in October 2009 was 120,000 units. Each unit costs $1.50 to make. The average selling price is $2.50 per unit. The cost is made up of 60% labor, 30% materials, and 10% shipping (to warehouse). Labor is paid the month of production, shipping the month after production, and raw materials the month prior to production. What is the production cash outflow for the month of October 2009 production, and in what months does it occur? Assume that the sales forecast for December 2009 is $2,500,000.