The Pioneer Petroleum Corporation has a bond outstanding with an $85 annual interest payment, a market price of $800, and a maturity date in five years. Find the following:
a. The coupon rate.
b. The current rate.
c. The yield to maturity
b. The current rate is 10.625%.
The current rate explains the relationship between the interest payment and the bond's market price. It is computed when the bond's par value and current value are different.
Richmond Rent-A-Car is about to go public. The investment banking firm of Tinkers, Evers & Chance is attempting to price the issue. The car rental industry generally trades at a 20 percent discount below the P/E ratio on the Standard & Poor’s 500 Stock Index. Assume that index currently has a P/E ratio of 25. The firm can be compared to the car rental industry as follows:
Car Rental Industry
Growth rate in earnings per share.....
Consistency of performance.............
4 out of 5 years
3 out of 5 years
Debt to total assets.....................
Turnover of product.........................
Slightly below average
Quality of management..................
Assume, in assessing the initial P/E ratio, the investment banker will first determine the appropriate industry P/E based on the Standard & Poor’s 500 Index. Then a half point will be added to the P/E ratio for each case in which Richmond Rent-A-Car is superior to the industry norm, and a half point will be deducted for an inferior comparison. On this basis, what should the initial P/E be for the firm?
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.
Machinery and equipment
Building and plant
Liabilities and stockholder’s claims
First lien, secured by machinery and equipment
Senior unsecured debt
Total stockholder’s claims
Total liabilities and stockholder’s claims
c. Assuming the administrative costs of bankruptcy, workers’ allowable wages, and unpaid taxes add up to $400,000, what is the total remaining asset value available to cover secured and unsecured claims?
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