Corporate Finance I

Long Term Financing and Leasing


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1. In January 1, 2000, Argo issued a 10-year, $200M bond paying 6.5% annually in two equal coupons each June and December. It is now June 2004 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, $230M bond. This bond matures in June 2009 and will pay 2.33% 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?

e. What does the answer to Question 1, Part d tell you?

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 2,500
Property Price ($) 955,000
Down Payment 20%
Interest Rate 4.4%
Closing Costs at Start $5,000
Broker Fee in Year 20 5.5%
Yearly Property Appreciation 1.7%
Rent/ sq. ft/ Inflator 3.30 1.5%
Op. Costs/ year ($)/ Inflator 9,640 1.5%
Tax Rate 21.0%
Depreciation/ year ($) 4,000

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