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- Mark Motel's debt has a face value of $40 million, a coupon rate of 14% (paid semiannually), and expires in 12 years (at t = 12 . The current annual yield-to-maturity (stated) for all bonds of the company is 15%. Mark wishes to conserve cash for the next few years. To do this, Mark decides to issue new equity and use the proceeds to purchase the existing debt at the market price. The current stock price of Mark is $60 and there are 2 million shares outstanding. 1. How many shares should Mark issue to purchase the existing debt? Assume the decision to purchase the bond does not change the stock price. Instead, the company decides to issue a zero-coupon bond that matures at year 5, and use the proceeds to purchase the existing debt at the market price. 2. What is the face value of the zero-coupon bond that Mark needs to issue?An investor pays $30,000 for a convertible bond (one that can be converted into shares of corporate common stock). The bond conversion rate is 100 shares of stock anytime within the next five years. What will the stock price have to be in year 3 in order for the investor to make 10% per year on the investment? Assume the bond interest rate is 4% per year payable annually.4. Leona Motel’s debt has a face value of $40 million, a coupon rate of 14% (paid semiannually), and expires in 12 years (at t = 12). The current annual yield-to-maturity (stated) for all bonds of the company is 15%. A) Leona wishes to conserve cash for the next few years. To do this, Leona decides to issue new equity and use the proceeds to purchase the existing debt at the market price. The current stock price of Leona is $60 and there are 2 million shares outstanding. How many shares should Leona issue to purchase the existing debt? Assume the decision to purchase the bond does not change the stock price. B) Instead, the company decides to issue a zero-coupon bond that matures at t = 5, and use the proceeds to purchase the existing debt at the market price. What is the face value of the zero-coupon bond that Leona needs to issue?
- The investment manager for Draxler Co. pays $988,472 to purchase a $1,000,000 face-value bond maturing in five years and paying interest semiannually at an annual rate of 2.75 percent. The annual market rate for comparable bonds at the time of issuance is 3.00 percent. With two years remaining, the manager determines that the bond will pay the full $1,000,000 at maturity but will pay $3,000 less in interest than planned every six months for the remainder of the bond’s life. The relevant present value factors for $1 and a $1 ordinary annuity are 0.9422 and 3.8544, respectively. If the bond’s current fair value with two years remaining is $994,800 and the amortized cost of the bond is $995,182, the current expected credit loss, assuming that the bond is classified as held-to-maturity, is closest to: A. $4,835 B. $6,710 C. $11,165 D. $11,545ABC Corporation has decided to sell ₱1000 bonds which will pay semiannual dividends of ₱20 (2% per period) and will mature in 5 years. The bonds are sold at ₱830, but after brokers' fees and other expenses the company ends up receiving ₱760. What is the company's cost of the capital raised through the sale of these bonds?You are hired to replace Samson as Finance Manager at Fun-land Corporation. You are given the following information concerning Fun-land Corporation: Debt: 12,000 bonds outstanding that pay $28.5 semi-annual coupon payments, with 15 years to maturity. The bond currently sells for 95 percent of its face value of $1,000. The corporate tax rate is 28%. Common stock: 235,000 shares of common stock currently selling for $56.5 per share. The stock will pay dividend of $3.5 next year. The dividend is expected to grow by 4 percent per year indefinitely. (a) Samson told you that the company’s pre-tax cost of debt is 5.7%, calculated by annual coupon payment of $57 per bond dividend by the face value of $1,000. Do you agree with his estimation? Briefly explain. (b) Calculate the cost of equity and after-tax cost of debt of Fun-land Corporation respectively. [in % with 2 decimal places.] (c) Calculate the company’s WACC. [in % with 2 decimal places.]
- En. Ibrahim is considering to purchase 1,000 common shares from Company ABC. Dividends from the shares are payable at the end of half-yearly. The next dividend is due in exactly six months and is expected to be RM0.55 per share. The required nominal rate of return is 10% convertible semi-annually and an estimated nominal rate of future dividend growth is 2% convertible semi- annually. (i) Calculate, showing all working, the price that En. Ibrahim should pay for the shares. As a result of a recently announced expansion plan by company ABC, En. Ibrahim increases the estimated rate of future dividend growth to a nominal rate of 3% convertible semi-annually. (ii) Calculate the maximum price that En. Ibrahim should now pay for the shares. (iii) Explain the difference between your answers to part (i) and part (ii).five years ago, Highland, Inc. issued a corporate bond with an annual coupon of $5,500, paid at the rate of $2,750 every six months, and a maturity of 14 years. The par (face) value of the bond is $1,000,000. Recently, however, the company has run into some financial difficulty and has restructured its obligations. Today's coupon payment has already been paid, but the remaining coupon payments will be postponed until maturity. The postponed payments will accrue interest at an annual rate of 6.5% per year and will be paid as a lump sum amount at maturity along with the face value. The discount rate on the renegotiated bonds, now considered much riskier, has gone from 8.5% prior to the renegotiations to 12.5% per annum with the announcement of the restructuring. What is the price at which the new renegotiated bond should be selling today? Recall that the compounding interval is 6 months and the YTM, like all interest rates, is reported on an annualized basis. (Enter just the number in…ABC Corporation has decided to sell ₱1000 bonds which will pay semiannualdividends of ₱20 (2% per period) and will mature in 5 years. The bonds are sold at₱830, but after brokers' fees and other expenses the company ends up receiving ₱760.Is the bond a good buy for an investor who expects a 9% return on his investments?
- Frozen Food Bhd has issued a bond with par value of RM1,000, a coupon rate of 9 percent that is paid semi-annually, and that matures in 10 years. If an investor requires a 12 percent yield, calculate the value of the bond. Briefly describe the relationship between the interest rate and bond value. Iriz Bhd paid RM2.00 per share in common stock dividends last year. The company's policy is to allow its dividend to grow at 5 percent for 4 years and then the rate of growth changes to 3 percent per year from year five and on. Assume the required rate of return is 8 percent, calculate the value of the stock.Gateway Services' CFO is interested in estimating the company's WACC. Eight years ago, the company issued a 30-year bond with a 7.5 percent annual coupon rate, payable semi-annually. The bonds have a face value of $1,000 per unit and currently sell for $1,105. The company’s common stock has a beta of 1.8, the risk-free rate is 2.5 percent, and the expected return on the market is 8.0 percent. Gateway’s tax rate is 25 percent and its target capital structure consists of 70 percent common equity and 30 percent debt. What is the company’s WACC?The shares of XYZ Inc. are currently selling for $120 per share. The shares are expected to go up by 10 percent or down by 5 percent in each of the following two months (Month 1 and Month 2). XYZ Inc. is also expected to pay a dividend yield of 2 percent at the end of Month 1. The risk-free rate is 0.5 percent per month. a. What is the value of an American call option on XYZ shares, with an exercise price of $125 and two months to expiration? Use the binomial model to obtain the answer.