Blooming Ltd. currently has the following capital structure: Debt: $2,500,000 par value of outstanding bond that pays annually 12% coupon rate with an annual before-tax yield to maturity of 10%. The bond issue has face value of $1,000 and will mature in 25 years. Ordinary shares: 65,000 outstanding ordinary shares. The firm plans to pay a $7.50 dividend per share in the next financial year. The firm is maintaining 3% annual growth rate in dividend, which is expected to continue indefinitely. Preferred shares: 40 000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 14%. Company tax rate is 30%. Required: Complete the following tasks: a) Calculate the current price of the corporate bond? gie foay a b) Calculate the current price of the ordinary share if the average return of the shares in the same industry is 9%?e avgm S) c) Calculate the current value of the preferred share if the average return of the shares in the same industry is 12% anideranin d) Calculate the current market value (rounded off to the nearest whole number) and capital structure of the firm {rounded off to two decimal places). Identify the total weights of equity fundingrit te no) e) Compute the weighted average cost of capital (WACC) under the traditional tax system for the firm. usine dividend constant growth model for calculation the cost of ordinary equity Caluɔlk%ze
Blooming Ltd. currently has the following capital structure: Debt: $2,500,000 par value of outstanding bond that pays annually 12% coupon rate with an annual before-tax yield to maturity of 10%. The bond issue has face value of $1,000 and will mature in 25 years. Ordinary shares: 65,000 outstanding ordinary shares. The firm plans to pay a $7.50 dividend per share in the next financial year. The firm is maintaining 3% annual growth rate in dividend, which is expected to continue indefinitely. Preferred shares: 40 000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 14%. Company tax rate is 30%. Required: Complete the following tasks: a) Calculate the current price of the corporate bond? gie foay a b) Calculate the current price of the ordinary share if the average return of the shares in the same industry is 9%?e avgm S) c) Calculate the current value of the preferred share if the average return of the shares in the same industry is 12% anideranin d) Calculate the current market value (rounded off to the nearest whole number) and capital structure of the firm {rounded off to two decimal places). Identify the total weights of equity fundingrit te no) e) Compute the weighted average cost of capital (WACC) under the traditional tax system for the firm. usine dividend constant growth model for calculation the cost of ordinary equity Caluɔlk%ze
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
Problem 15P
Related questions
Question
Transcribed Image Text:Blooming Ltd. currently has the following capital structure:
Debt: $2,500,000 par value of outstanding bond that pays annually 12% coupon rate with an
annual before-tax yield to maturity of 10%. The bond issue has face value of $1,000 and will
mature in 25 years.
Ordinary shares: 65,000 outstanding ordinary shares. The firm plans to pay a $7.50 dividend per
share in the next financial year. The firm is maintaining 3% annual growth rate in dividend, which
is expected to continue indefinitely.
Preferred shares: 40 000 outstanding preferred shares with face value of $100, paying fixed
dividend rate of 14%.
Company tax rate is 30%.
Required: Complete the following tasks:
a) Calculate the current price of the corporate bond? gie foay a
b) Calculate the current price of the ordinary share if the average return of the shares in
the same industry is 9%?e avgm S)
c) Calculate the current value of the preferred share if the average return of the shares in
the same industry is 12% anideranin
d) Calculate the current market value (rounded off to the nearest whole number) and capital
structure of the firm {rounded off to two decimal places). Identify the total weights of
equity fundingrit te no)
e) Compute the weighted average cost of capital (WACC) under the traditional tax system
for the firm. usine dividend constant growth model for calculation the cost of ordinary
equity Caluɔlk%ze
Expert Solution
Part a-
Current price of Corporate Bond-
| Face Value | 1000 |
| Coupon Rate | 0.12 |
| Coupon Payment | 120 |
| Number of years | 25 |
| YTM | 0.1 |
| Current Price of Bond | $1,181.54 |
(Excel formula for Bond Price= -PV(YTM, Number of years, Coupon Payment, Face Value))
Part b-
Current Price of Ordinary Share
= Expected Dividend in Year 1/ Return- Growth Rate
= $7.50/ 0.09-0.03
= $125
Step by step
Solved in 3 steps
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Financial Reporting, Financial Statement Analysis…
Finance
ISBN:
9781285190907
Author:
James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:
Cengage Learning