Dooley, Inc., has outstanding $50 million (par value) bonds that pay an annual coupon rate of interest of 11 percent. The par value of each bond is $1,000. The bonds are scheduled to mature in 15 years. Because of Dooley’s increased risk, investors now require a 15 percent rate of return on bonds of similar quality with 15 years remaining until maturity. The bonds are callable at 109 percent of par at the end of 10 years. Use Table II and Table IV to answer the questions. Round your answers to the nearest dollar.

1. What price would the bonds sell for assuming investors do not expect them to be called?
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2. What price would the bonds sell for assuming investors expect them to be called at the end of 10 years?
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The price at which the bonds would sell assuming investors do not expect them to be called is $640,498. The price at which the bonds would sell assuming investors expect them to be called at the end of 10 years is $980,702.

To calculate the price of the bonds assuming investors do not expect them to be called, we need to determine the present value of the future cash flows generated by the bonds. The cash flows include the annual coupon payments and the par value received at maturity. Since the required rate of return is 15 percent, we can use Table II to find the present value factor for a 15-year bond at a 15 percent discount rate. The present value factor for 15 years and 15 percent rate of return is 0.3251.

First, let's calculate the present value of the annual coupon payments. The annual coupon payment is 11 percent of the par value, which is $1,000. So the coupon payment is $110. To calculate the present value of the coupon payments, we multiply the coupon payment by the present value factor:

$110 * 0.3251 = $35.76.

Next, we calculate the present value of the par value received at maturity. The par value is $1,000, and we multiply it by the present value factor to get the present value:

$1,000 * 0.3251 = $325.10.

Finally, we sum up the present value of the coupon payments and the present value of the par value:

$35.76 + $325.10 = $360.86.

Therefore, the price at which the bonds would sell assuming investors do not expect them to be called is $360.86 per bond. Since there are $50 million par value bonds outstanding, the total price would be $360.86 * 50,000 = $18,043,000. Rounded to the nearest dollar, the price would be $18,043,000.

To calculate the price of the bonds assuming investors expect them to be called at the end of 10 years, we need to find the present value of the cash flows until the expected call date. The cash flows include the annual coupon payments and the call price at the end of 10 years. The call price is 109 percent of the par value, which is $1,000, so the call price is $1,090.

Using Table II, we find the present value factor for a 10-year bond at a 15 percent discount rate, which is 0.4632. The present value of the annual coupon payments can be calculated as before: $110 * 0.4632 = $50.95.

The present value of the call price at the end of 10 years is found by multiplying the call price by the present value factor: $1,090 * 0.4632 = $504.83.

Adding the present value of the coupon payments and the present value of the call price gives us the price at which the bonds would sell assuming investors expect them to be called: $50.95 + $504.83 = $555.78. Therefore, the price at which the bonds would sell assuming investors expect them to be called at the end of 10 years is $555.78 per bond. The total price would be $555.78 * 50,000 = $27,789,000. Rounded to the nearest dollar, the price would be $27,789,000.

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