The following information is available about Green Valley Ltd’s newly issued securities and investment projects under consideration. A corporate bond that has 12% annual coupon rate, yield to maturity of 10.5%. The bonds have a face value of $1,000 and will mature 15 years from now. Two alternative investment projects, of which the company only has enough capital to undertake either of them.
The following information is available about Green Valley Ltd’s newly issued securities and investment projects under consideration. A corporate bond that has 12% annual coupon rate, yield to maturity of 10.5%. The bonds have a face value of $1,000 and will mature 15 years from now. Two alternative investment projects, of which the company only has enough capital to undertake either of them.
Chapter20: Financing With Derivatives
Section: Chapter Questions
Problem 14P
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Question
The following information is available about Green Valley Ltd’s newly issued securities and investment projects under consideration.
- A corporate bond that has 12% annual coupon rate, yield to maturity of 10.5%. The bonds have a face value of $1,000 and will mature 15 years from now.
- Two alternative investment projects, of which the company only has enough capital to undertake either of them.
Year |
Project A |
Project B |
Initial Investment |
$88,500 |
$98,500 |
1 |
$45,000 |
$51,000 |
2 |
$39,000 |
$48,000 |
3 |
$33,000 |
$43,000 |
4 |
$31,000 |
$42,000 |
Required:
Compute the value of Green Valley Ltd’s bond.
Advise the company’s management on which project the company should choose, using Profitability Index (PI) investment criterion if the required
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