Question

1. Dividents paid by a corporation can reduce the taxable income of the corporation.

Select one:

True

False

2. You have an 10% semiannual pay bond with face value of $1,000 that matures in 8 years. if the yield is $11% what is the price of this bond?

select one:

a) $947.69

b) $997.69

c) $957.69

s) $ 977.69

Answer 1

1. Dividend is the amount of net income available for the common shareholders which is distributed to the common stockholders. The amount distributed is calculated after the tx payment and payment of preferred stock dividend so it has no relation with the taxable profit.

Dividend distribution has no impact on taxable income as dividend comes after the taxes are reduced from the income so distribution of dividend will not impact the taxable income of the company.

Thus the correct Option is --------False.

2. Bond price is the future potential income of bonds to taken at present level, if the market interest rate is more than coupon rate then it's price will be lower than its face value.

Here the coupon rate is semiannual so interest will be paid semiannually will be $ 50 ( 1000× 10% ×1/2). I.e the interest rate will be 5% semiannually.

And the discount rate will also be taken semiannually as 5.5%.

Bond Price = Present value of Interest for life of bond + Present value of Maturity of bond.

Here the annuity value to be taken of 5.5% for 16 times as ( 8 years semiannual ) will be = 10.4622

Pv factor for 16th semiannual term = 0.42458

Bond Price =( Interest × Annuity factor ) + ( maturity value × PV factor)

Bond price = ( $ 50 × 10.4622) + ( $ 1000 × 42458).

Bond price = $ 523.11 + $ 424.58

Bond price = $ 947.69

Thus the correct Option is-------------A i.e $ 947.69