Excel assignment for Math Guruu

March 2021 | MGMT 332 | College of Business | worldwide.erau.edu

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MGMT 332
Corporate Finance I

Module 7: Long Term Financing and Leasing

Problem Set 7 – Long Term Financing and Leasing

1. In January 1, 2016, Argo issued a 10-year, $700M bond paying 5.55% annually in two
equal coupons each June and December. It is now June 2020 and Argo just paid the
June coupon on its existing bond. Rates have come down, so it is thinking of buying
back the bond and issuing a 5-year, $300M bond. This bond matures in June 2025 and
will pay 3.45% per year in equal coupons each June and December.

a. What is the price that Argo must pay the current bond holders to buy back the
bond? (Hint – the present value of the coupon payments and the final face value)

b. What are the cash flows associated with the new bond?
c. What are the cash flow differentials to Argo? In other words, what are the net

cash flows in or out for Argo each June and December when comparing both
bonds?

d. What is the present value of these cash flow differentials?

2. Argo’s real estate department is considering buying an office and leasing it out. They
ask you to calculate the NPV (7% discount rate) and IRR of the investment and have
given you the data below. Assume that the office is sold in year 20 and that the
mortgage runs 20 years.

Item Value Inflator

Square Footage 2,000
Property Price ($) 595,000
Down Payment 20%
Interest Rate 5.2%

Closing Costs at Start $4,000
Broker Fee in Year 20 5.0%

Yearly Property Appreciation 1.2%
Rent/ sq. ft/ Inflator 1.40 1.5%

Op. Costs/ year ($)/ Inflator 3,400 1.5%
Tax Rate 21.0%

Depreciation/ year ($) 2,000

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Module 7: Long Term Financing and Leasing

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