You bought one of rocky mountain manufacturing co.’s 5.7 percent coupon bonds one year ago for $1,032.15. these bonds make annual payments and mature nine years from now. suppose you decide to sell your bonds today, when the required return on the bonds is 5.1 percent. if the inflation rate was 3.5 percent over the past year, what would be your total real return on the investment?

$18,497

Explanation:

As per Accounting Equation;

Total Assets = Total Liabilities + Stockholders' Equity

Total Assets = $223,500

Suppose, If;

Total Liabilities = x, &

Stockholders' Equity = y, then above equation can be written as follows;

$223,500 = x + y Equation 1

Debt to Equity Ratio formula is as follows;

D/E = Total Liabilities / Stockholders' Equity

where, D/E = 0.45

Based on the assumptions the above equation can be written as follows;

0.45 = x / y

Multiply whole equation by 'y' we get;

x = 0.45y

Put the value of x in Equation 1 we get;

0.45y + y = $223,500

1.45y = $223,500

Divide the above equation by 1.45 we get;

y = $223,500/1.45

y = $154,137.93

which means Stockholders' Equity = $154,138

Now let's substitute the value of Stockholders' Equity in the Return on Equity Ratio formula to find the net income as follows;

ROE = Net Income / Stockholders' Equity

where, ROE = 12%

12% = Net Income / $154,138

Multiply the above equation by $154,138, we get;

Net Income = $154,138 x 12%

Net Income = $18,496.55

Hence Net Income of the Blue Bird LTD for the period would be $18,497.