Posted: February 8th, 2016

You are running a hot internet company. Analysts predict that its earnings will grow at 30% per year for the next five years. After that, as competition increases, earnings growth is expected to slow to 2% per year and continue at that level forever. Your company has just announced earnings of $1,000,000. What is the present value of all future earnings if the interest rate is 8%? (Assume all cash flows occur at the end of the year). Can you help me get started with this assignment?

The initial proceeds per bond, the size of the issue, the initial maturity of the bond, and the years remaining to maturity are shown in the following table for a number of bonds. In each case, the firm is in the 40 percent tax bracket, and the bond has a $1,000 par value.

Bond Proceeds per bond Size of issue Initial maturity of bond Years remaining to maturity
A $ 985 10,000 Bonds 20 years 15 years
B 1,0325 20,000 25 16
C 1,000 22,500 12 9
D 960 5,000 25 15
E 1,035 10,000 30 16

a. Indicate whether each bond was sold at a discount, at a premium, or at its par value.

b. Determine the total discount or premium for each issue.

c. Determine the annual amount of discount or premium amortized for each bond.

d. Calculate the unamortized discount or premium for each bond.

e. Determine the after-tax cash flow from the unamortized discount associated with the retirement now of each of these bonds, using the values developed in part (d).