Morell Corp Has a Callable Bond Outstanding

question 27

Multiple Choice

Morell Corp has a callable bond outstanding. The call provision guarantees that the bond won't be called in the first ten years of its life, and if it is called thereafter the bondholder will be compensated with an extra year's interest at the 12% coupon rate. The bond is now five years into its 25 year life. The market interest rate has fallen to 6%, so it is likely that the bond will be called as soon as the contract allows. What should the bond sell for today?

• A)$1,255.91
• B)$1,345.20
• C)$1,693.44
• D)$1,120.00

---

Definitions:

Earnings Multiple

A valuation ratio that compares a company's current share price to its per-share earnings, commonly used to gauge stock prices.

Abnormal Earnings

Earnings that are above or below the normal or expected level due to unusual circumstances or events.

Actual Earnings

The real profits generated by a company within a specific period, usually reported quarterly or annually.

Earnings Quality

An assessment metric that evaluates the degree to which a company's earnings are derived from sustainable sources and are repeatable, controllable, and bankable.