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Dooley, Inc., has outstanding $50 million (par value) bonds that pay an annual coupon rate of interest of 11.5 percent. The par value of each bond is $1,000. The bonds are scheduled to mature in 16 years. Because of Dooley’s increased risk, investors now require a 15 percent rate of return on bonds of similar quality with 16 years remaining until maturity. The bonds are callable at 107 percent of par at the end of 9 years.

Use Table II and Table IV to answer the questions. Round your answers to the nearest dollar.

1. What price would the bonds sell for assuming investors do not expect them to be called?
$ __________

2. What price would the bonds sell for assuming investors expect them to be called at the end of 9 years?
$ __________

Answer :

The bonds would sell for approximately $348.86 assuming investors do not expect them to be called. The price at which the bonds would sell assuming investors do not expect them to be called can be calculated using the present value formula.

The present value of the bond is the sum of the present value of the coupon payments and the present value of the principal repayment. To calculate the present value of the coupon payments, we need to determine the annual coupon payment and the required rate of return. The annual coupon payment is $1,000 (par value) multiplied by the coupon rate of 11.5 percent, which gives $115.

Using Table II, we find that the present value factor for 16 years and a required rate of return of 15 percent is 0.2864.
Therefore, the present value of the coupon payments is $115 multiplied by 0.2864, which equals $32.96.
Next, we need to calculate the present value of the principal repayment. The principal repayment is the par value of $1,000. Using Table II, we find that the present value factor for 16 years and a required rate of return of 15 percent is 0.3159. Therefore, the present value of the principal repayment is $1,000 multiplied by 0.3159, which equals $315.90.
Finally, we add the present value of the coupon payments and the present value of the principal repayment to find the price at which the bonds would sell assuming investors do not expect them to be called.
$32.96 + $315.90 = $348.86.
Therefore, the bonds would sell for approximately $348.86 assuming investors do not expect them to be called.

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