Accounting Problem 4 and 5

| September 28, 2018

Problem 4You are in the market to purchase a new automobile. Marginal Deal, Inc. will give you_a deal of $500 off the list price on a $10,000 Porsche. Consider the following historical events relating to your automobile purchase.a. You can get the same care from Great Deals, Inc. if you pay $4,000 down and the rest at the end of two years. If the interest rate were 12 percent, where would you purchase the car?b. Great Deals, Inc. has revised its offer. You now pay $2,000 down, $3,000 at the end of the first year and $5,000 at the end of the second year. If the interest rate is still 12 percent, where would you buy the new Porsche?c. Marginal Deal, Inc., in turn, makes a new offer. You pay $10,000, but you can borrow the sum from the dealer at 0.5 percent per month for 36 months even though the going market rate is 1 percent per month, with the first payment made when the car is delivered. If you accept the offer, (1) what would your monthly payments be? (2) What would the cost of the Porsche to you be?Problem 5Your next significant task as financial manager of the Alpha-Beta Group (ABG) is to price several types of bonds, considering various market conditions, for your chief executive officer. You must utilize your extensive knowledge of finance and make bond decisions for the boss and answer the following scenarios provided for your firm.MaturityCoupon RateCoupon IssueFive Years6 percentZero CouponFive years0 percentPerpetualInfinity6 percentConvertibleFive year5 percentShow your calculations!a. If the market yield is 7 percent, what are the values of the three first bonds (assume a face value of $1,000)?b. Why are the values of the bonds lower than their face value?c. Why is the coupon rate for the convertible bond lower than that for the nonconvertible coupon issue?c. Given that the convertible bond is trading at $1,040, what is the value of the option to convert?c. Suppose that the market yield rises to 7.5 percent. What are the bond values at that yield?

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