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Answers to supplementary objective test

questions

CHAPTER 1 – LONG TERM FINANCE

1.1 $37.17

The YTM on irredeemable bonds is calculated using the formula YTM = i/P o

Therefore, P o = i/YTM

P o = 5/0.1345

P o = $37.17

1.2 A

Cumulative preference dividends can be rolled forward and paid in future
periods if the funds are unavailable in the current year.

1.3 $4.55
3 × 4.65 13.95
1 × 4.25 4.25
–––––
18.20
–––––
/4
TERP $4.55

1.4 6.39%

YTM for irredeemable bonds given via an IRR calculation.
5% 10%
CF DF PV CF DF PV
t0 (100) 1 (100) (100) 1 (100)
t1–4 4 3.546 14.18 4 3.17 12.68
t4 110 0.823 90.53 110 0.683 75.13
NPV 4.71 (12.19)

IRR = 5 + (4.71/(4.71 + 12.19)) × (10-5)

= 6.39%

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