Megatron Ltd has an equity beta of 1.5. The market risk premium in South Africa is expected to be 5% and yield on government bond (risk free rate) is currently 9.5%. Megatron has issued bonds and its R100 par value bond is currently trading at R94.50. The coupon is 10%. The maturity date is in 5 years’ time and the corporate tax rate is 28%. Interest is payable annually in arrears. What is the weighted average cost of capital if target debt to equity ratio is 50% and the cost of equity and debt is 15% and 8% respectively

Megatron Ltd has an equity beta of 1.5. The market risk premium in South Africa is expected to be 5% and yield on government bond (risk free rate) is currently 9.5%. Megatron has issued bonds and its R100 par value bond is currently trading at R94.50. The coupon is 10%. The maturity date is in 5 years’ time and the corporate tax rate is 28%. Interest is payable annually in arrears. What is the weighted average cost of capital if target debt to equity ratio is 50% and the cost of equity and debt is 15% and 8% respectively

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 10P

See similar textbooks

Similar questions

Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for 1,135.90, producing a nominal yield to maturity of 8%. However, the bond can be called after 5 years for a price of 1,050. (1) What is the bonds nominal yield to call (YTC)? (2) If you bought this bond, do you think you would be more likely to earn the YTM or the YTC? Why?
a) Jon plc is listed on the London Stock Exchange. If, using the CAPM approach, Jon’s return on equity is 5% and risk premium is 3%. The beta is 0.7. What is the return on short dated government bonds? b) Calculate the yield to maturity of a £100 nominal value irredeemable bond with a coupon rate of 6% and a market value of £110. c) A 10-year corporate bond has 6 years remaining until redemption. The par value is £100 and it makes annual coupon payments. The coupon rate is 4%. The yield to maturity is 8%. Calculate the market price of the bond based on the above information. d) Briefly discuss the factors to be considered when a company decides to make rights issues?
1) Universal Auto Limited has a zero coupon bond outstanding with a $50,000 face value that matures in one year. The current market value of the firm's assets is $58,000. The standard deviation of the return on the firm's assets is 28 percent per year, and the risk-free rate is 5 percent per year, compounded continuously. What is the market value of the firm's equity and debt? Use four decimal points for the cumulative probability computations. 2) Suppose the government provides a guarantee for the firm's bond. What will be the market value of the firm's debt? What is the value of the government's guarantee? 3) Continuing with part 2) above, the government guarantee may be regarded as a put option Who owns the put option? What is the exercise price of the put option? What should the shareholders and bondholders do if the asset value of the firm drops to $36,000 at the end of one year? Using the idea of options, explain why shareholders in a levered firm have incentives to undertake…
YunJun, Inc. is contemplating to issue a convertible bond that would be priced at its $1,000 par value. The bonds would have a 9.00% annual coupon, and each bond could be converted into 25 shares of common stock. The required rate of return on an otherwise similar nonconvertible bond is 11.00%. The stock currently sells for $42.00 a share, has an expected dividend in the coming year of $2.10, and has an expected constant growth rate of 6.00%. What is the estimated floor price of the convertible at the end of Year 3?
To expand its business, the ABC factory would like to issue a bond with par value of P1,000, coupon rate of 10 percent, and maturity of 10 years from now. What is the value of the bond if the required rate of return is 8%? *
Two years ago, Malayawata Steel issued RM 100 million worth of ten-year bonds with a face value of RM1,000.00 and a coupon rate of 5%. Coupon payments are made semi-annually.Two years ago, the market yield-to-maturity was 3% p.a.Due to the increased insecurity facing the industry, the market yield to maturity is now 7% p.a.a) Determine the market price of the bonds at issue based on an appropriate model.b) Based on the yield-to-maturity today, assess whether the price has changed and proceed to determine its market price today.c) Compare the results in (a) and (b) above and interpret the sensitivity of bond prices to maturity and yield to maturity.
Two years ago, Company XYZ issued $100 million worth of ten-year bonds with a face value of $1,000 and a coupon rate of 5%. Coupon payments are made semi-annually. Two years ago, the market yield-to-maturity was 3% p.a. Due to the increased insecurity facing the industry, the market yield to maturity is now 7% p.a. a) Determine the market price of the bonds at issue based on an appropriate model. b) Based on the yield-to-maturity today, assess whether the price has changed and proceed to determine its market price today. c) Compare the results in (a) and (b) above and interpret the sensitivity of bond prices to maturity and yield to maturity.
One of the England’s largest corporations just expanded operations into the United States. At present, the firm has a 30 year, $10,000 par value bond outstanding, with a coupon rate of 4.3% percent paid semiannually and 15 years to maturity. The yield to maturity on this bond is 5.2 percent. What is the current value of the bond? Once you have calculated the Present Value or the current price of the bond, what would be the Current Yield on this bond? Is it selling at a discount, par, or premium?