Little Lemon Co. is identifying the value of its equity using the enterprise value approach as they have never issued dividends to-date because the Company is still at its early stages. With this, they have the following available information: The government's real free rate for its debt securities is estimated at 3.5% with an estimated inflation premium of 1.5%. The target capital structure of Little Lemon is at 60% debt and 40% equity Little Lemon was able to determine that its cost of debt is estimated as: With 3 years maturity - 6.50% With 4 years maturity - 7.0% With 5 years maturity - 8.0% The following are the information about the current debts issued by Little Lemon A 3-year maturity instrument carries a Php500,000 face value and 8.0% coupon A 5-year maturity instrument carries a Php500,000 face value and 8.0% coupon Considering the current crisis, equity investors generally demand a 3.5% premium over government securities Little Lemon's estimated beta is at 1.2 1. What is the fair value of the 5-year maturity bond? 2. What is the fair value of the 3-year maturity bond? 3. What is the cost of equity?
Little Lemon Co. is identifying the value of its equity using the enterprise value approach as they have never issued dividends to-date because the Company is still at its early stages. With this, they have the following available information: The government's real free rate for its debt securities is estimated at 3.5% with an estimated inflation premium of 1.5%. The target capital structure of Little Lemon is at 60% debt and 40% equity Little Lemon was able to determine that its cost of debt is estimated as: With 3 years maturity - 6.50% With 4 years maturity - 7.0% With 5 years maturity - 8.0% The following are the information about the current debts issued by Little Lemon A 3-year maturity instrument carries a Php500,000 face value and 8.0% coupon A 5-year maturity instrument carries a Php500,000 face value and 8.0% coupon Considering the current crisis, equity investors generally demand a 3.5% premium over government securities Little Lemon's estimated beta is at 1.2 1. What is the fair value of the 5-year maturity bond? 2. What is the fair value of the 3-year maturity bond? 3. What is the cost of equity?
Chapter13: Capital Structure Concepts
Section: Chapter Questions
Problem 3P
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Little Lemon Co. is identifying the value of its equity using the enterprise value approach as they have never issued dividends to-date because the Company is still at its early stages. With this, they have the following available information:
- The government's real free rate for its debt securities is estimated at 3.5% with an estimated inflation premium of 1.5%.
- The target capital structure of Little Lemon is at 60% debt and 40% equity
- Little Lemon was able to determine that its cost of debt is estimated as:
- With 3 years maturity - 6.50%
- With 4 years maturity - 7.0%
- With 5 years maturity - 8.0%
- The following are the information about the current debts issued by Little Lemon
- A 3-year maturity instrument carries a Php500,000 face value and 8.0% coupon
- A 5-year maturity instrument carries a Php500,000 face value and 8.0% coupon
- Considering the current crisis, equity investors generally demand a 3.5% premium over government securities
- Little Lemon's estimated beta is at 1.2
1. What is the fair value of the 5-year maturity bond?
2. What is the fair value of the 3-year maturity bond?
3. What is the
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