Marie Snell Recently Inherited Some Bonds (Face Value $100,000)from Her

question 112

Multiple Choice

Marie Snell recently inherited some bonds (face value $100,000) from her father,and soon thereafter she became engaged to Sam Spade,a University of Florida marketing graduate.Sam wants Marie to cash in the bonds so the two of them can use the money to "live like royalty" for two years in Monte Carlo.The 2 percent annual coupon bonds mature on January 1,2030,and it is now January 1,2010.Interest on these bonds is paid annually on December 31 of each year,and new annual coupon bonds with similar risk and maturity are currently yielding 12 percent.If Marie sells her bonds now and puts the proceeds into an account which pays 10 percent compounded annually,what would be the largest equal annual amounts she could withdraw for two years,beginning today (i.e. ,two payments,the first payment today and the second payment one year from today) ?

• A) $13,255
• B) $29,708
• C) $12,654
• D) $25,305
• E) $14,580

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Definitions:

Retention Ratio

The fraction of net profits not paid out as dividends but kept within the corporation for reinvestment or other purposes.

Dividend Payout Ratio

The fraction of net income a firm pays to its shareholders in dividends, representing how much money a company returns to shareholders versus retaining for growth.

Net Income

The total profit of a company after all expenses, taxes, and costs have been deducted from total revenue.

External Financing Needed

The additional funds a company requires from external sources to finance its planned activities or growth when internal cash flows are insufficient.