Question

Click "Verify" to proceed to the next part of the question. GHI Company has existing debt issued three years ago with a coupon rate of 6%. The firm just issued new debt at par with a coupon rate of 5%. What is GHI Company's pre-tax cost of debt? Enter your answer as a percentage. Do not include a percent sign in your answer. Enter your response below. Peaceful Cruises wants to build a new cruise ship that has an initial investment of $200 million. It is estimated to provide an annual cash flow over the next 20 years of $27 million per year. The discount rate is 11%. What is the discounted payback period? Enter your answer rounded to two decimal places

Answer 1

To calculate the present value of a bond, you need to discount the future cash flows using the discount rate. If the discount rate is 8%, the present value of the bond will be different than if the discount rate is 11%.

Step-by-step explanation:

To calculate the present value of a bond, we need to discount the future cash flows using the discount rate. Let's consider the two-year bond example given. The bond pays a coupon of $240 at the end of each year for two years and returns the principal of $3,000 at the end of the second year.

If the discount rate is 8%, we discount the cash flows by 8% each year. The present value of the bond, in this case, would be the sum of the present values of the coupon payments and the principal: 240/(1+0.08) + (240+3000)/(1+0.08)^2.

If the interest rates rise and the discount rate becomes 11%, we discount the cash flows by 11% each year. The present value of the bond, in this case, would be the sum of the present values of the coupon payments and the principal: 240/(1+0.11) + (240+3000)/(1+0.11)^2.