The Value of a One-Year Cardinal Health Bond

* Interest rate had a 125bp spread over the current yield on 10-year US Treasury bonds (=4.25%).

b. What would be the value of each bond if they had annual coupon payments?

A bond with an annual coupon of $70 and originally sold at par for $1,000. The current market interest rate (yield to maturity) is 8%. This bond will sell at _______. Assuming no change in market interest rates, the bond will present the holder with capital ________ as it matures.

the sale of germicidal, sanitation, and antiseptic products for health care uses. However, the beta given in the appendix is the levered beta, which we have converted to unlevered beta and then averaged the unlevered beta of the two comparable companies. This unlevered beta has then been applied to the proposed capital structure of 30% debt and 70% equity. This is the unlevered beta of the unit under consideration. This is then converted to calculate the levered project beta as 0.936. The levered beta for Chiron is 0.85 and for pathogen is 0.90. This means that Montagne Medical Instruments Company's germicidal, sanitation, and antiseptic products unit carries more business risk compared to its competitors’ viz. Chiron and Pathogen.

Ross, S. A., Westerfield, R. W., & Jordan, B. D. (Eds.). (2011). Essentials of corporate finance (7th ed., Rev.). New York, NY: McGraw-Hill Irwin.

With the synergies expected, the value to CPP increases by $14.6 Million (see exhibit 4). Generally for the particular small firms to maintain rating of A, the firms have to maintain a debt service ratio of 6. Hence it is practical to assume interest coverage ratio of 6.0x in the long term for Pinkerton in this case. Pinkerton gets benefit from 34% tax shield, which account for the value of $15.4 Million (see exhibit 5). Therefore, as calculated in exhibit 6, the total value of Pinkerton from 3 sources to CPP in expected case is $119.7 Million. This is higher than the $100 million asking price. Financing: Free cash flow after debt service is still positive in both options. For the value to existing shareholder, as option 1 CPP gives premium of $15.2 Million over $25 Million for 45% stake of CPP to investors, option 2 of $100 Million Debt would be more preferable.

Andrea Winfield considered issuing bonds was not a good option for financing the acquisition. She was particularly concerned about the increasing long-term debt and annual cash layout of $ 6.25 million for 15 years. We believe that her concerns are justified, because the Company had already significant amount of debt that could result in higher risks and stock price

Three interrogations were thus to answer. Should the company provide investors with classic bonds or give them the opportunity to convert them into equity? Should they structure the offer with a fixed or a floating coupon rate? And last but not least, where should they locate the operation?

D* = 3.59/1.053 = 3.41 years Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.

- The Bet-r-Bilt Company has a 5-year bond outstanding with a 4.30 percent coupon. Interest payments are paid semi-annually. The face amount of the bond is $1,000. This bond is currently selling for 93 percent of its face value. What is the company's pre-tax cost of debt?

The bonds have 20 years to maturity, pay interest at 9.3%, have a par value of $1,000 and are currently selling for $890.

So, the 20 year corporate bond interest rate associated with the company’s rating is 3.86.

Considering UST only had short-term debt issues prior to the recapitalization, and that credit ratings depend on maturity of debt issued, we cannot simply rely on the commercial paper ratings to extrapolate. We assume that rating will be A based on competitors’ ratings as well as UST’s overall financial standing. We then use this assumption to calculate the value of the company using the two methods above.

b. What is Q’s stock worth per share? How does that value depend on the payout ratio and growth rate after year 4?

The company’s objective is to improve its competitive position in deep-discount brokerage. In order to achieve this objective, the company must grow its customer base, requiring an investment of $100 million to upgrade its technological capabilities as well as an increase of $155 million for its advertisement budget. In order to evaluate the company’s cost of capital, we used the Cost Asset Pricing Model. Since the company went public recently, it would not be an accurate assessment of the risk of