CHAPTER 20

MULTIPLE CHOICE

1. B 8. D 15. C 22. B 29. A

2. C 9. D 16. D 23. B 30. C

3. D 10. A 17. D 24. A 31. C

4. D 11. C 18. B 25. -- 32. A

5. A 12. D 19. D 26. B 33. C

6. C 13. A 20. A 27. C 34. --

7. D 14. C 21. B 28. B 35. --

COMPUTATIONS:

8.
9.

10. Source Cost Weight WAC

Long-term debt 10% .30 .03

Preference Share 15% .20 .03

Ordinary Equity 20% .50 .10

.16
To get the weighted average cost of capital, determine first the weighted cost of capital through
multiplying the cost of capital by its corresponding weight for each particular source of financing.
Then, the summation of the weighted cost of capital equals the weighted average cost of capital.

12.
15. Current Yield = 7.5% * 1, 000

776

= 9.7%

17. Yield to Maturity = 1, 000 - 720

8.2% * 1000 + 5

1, 000 + 720
2
138
=
860

= 16.04%
22. Current Yield = 12% * 1, 000

960

= 12.5%

23. Normal Yield = P 114 / P 920 = 12.4%

25. GIVEN:

Original term of the Old Bond = 20 years

Remaining Life of the Old Bond = 5 years

Discount Rate = 6%

Amount of Bond = P 10 Million

Old Interest Rate = 10%

New Interest Rate = 8%

Call Premium = 1%

Underwriting Cost on New Issue = P 0

Tax Rate = 40%

OUTFLOWS:

Call Premium (after tax) = P 10 Million * 0.05 * (1 – 0.4)

= P 300, 000

Underwriting Cost per year = P 400, 000

1
= P 80, 000
 PV of Underwriting Cost = 1 – (1 + .06)^-5

(P 80, 000 * 0.4) * .06

= P 134, 796

Underwriting Cost (after tax) = P 400, 000 – P 134, 796

= P 265, 204

Total Outflow = P 300, 000 + P 265, 204

= P 565, 204

INFLOW:

PV of Cash = P 10Million * (10% - 8%) * (1 – 0.4) * 4, 212, 364 = P 505, 484

NPV = P 505, 484 – P 565, 204 = ( P 59, 720 )

26. The yield of preference shares will not change. = 10%

28. 250, 000 (14 – 5) = P 2, 250, 000

250, 000 * 0.06 * (34 – 5) = 435, 000

P 2, 685, 000

29. (P 28 + P 3) – P 25 = P 6

30. P10 / 5 = P 2 + P 45 = P 47

AURE, CRUZ, EYANA, ILDEFONSO, VILLAZOR, ZAPICO