Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 30, Problem 14P
a)
Summary Introduction
To determine: The effective borrowing rate.
Introduction:
Effective interest rate is rate of the amount actually paid in the investments, financial products and loans paid or received.
b)
Summary Introduction
To determine: The effective borrowing rate and suggest the firm how to lock in the new credit quality for the next 7 years:
Introduction:
Effective interest rate is rate of the amount actually paid in the investments, financial products and loans paid or received.
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A) On the fixed income side, the fund has issued £500m 5 year bonds, semi-annual pay, floating rate notes with coupons equal to 180 day LIBOR plus 30 basis points. Now, one year later, the risk manager is worried that the interest rates might rise over rest of tenor of the issue. Hence, the firm decide to go long into a 3 year payer swaption with a fixed rate of 2.5%, semi-annual pay, with N.P of £500m. For simplicity, assume that swap and FRN have the same settlement dates. At the swap initiation, 180 day LIBOR is at 3% and 360 day LIBOR is at 3.5%.
Required:
Show the net settlement in 180 and 360 days?
Show the firm the has effectively eliminated the uncertainty associated with FRN by entering into a swap?
Storm Software wants to issue $100 million in new capital to fund newopportunities. If Storm raised the $100 million of new capital in a straight-debt 20-yearbond offering, Storm would have to offer an annual coupon rate of 12%. However, Storm’sadvisers have suggested a 20-year bond offering with warrants. According to the advisers,Storm could issue 9% annual coupon-bearing debt with 20 warrants per $1,000 face valuebond. Storm has 10 million shares of stock outstanding at a current price of $25. The warrantscan be exercised in 10 years (on December 31, 2028) at an exercise price of $30. Eachwarrant entitles its holder to buy one share of Storm Software stock. After issuing the bondswith warrants, Storm’s operations and investments are expected to grow at a constant rateof 11.4% per year.a. If investors pay $1,000 for each bond, what is the value of each warrant attached to thebond issue?b. What is the component cost of these bonds with warrants? What premium is associatedwith the…
Suppose your company needs to raise $28 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 8 percent, and you're evaluating two issue alternatives: an 8 percent annual coupon and a zero coupon bond. Your company's tax rate is 25 percent. In 20 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zeros? (Assume annual compounding on the zero coupon bond.)
Chapter 30 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 30.1 - How can insurance add value to a firm?Ch. 30.1 - Prob. 2CCCh. 30.2 - Prob. 1CCCh. 30.2 - What are the potential risks associated with...Ch. 30.3 - How can firms hedge exchange rate risk?Ch. 30.3 - Prob. 2CCCh. 30.4 - How do we calculate the duration of a portfolio?Ch. 30.4 - How do firms manage interest rate risk?Ch. 30 - The William Companies (WMB) owns and operates...Ch. 30 - Genentechs main facility is located in South San...
Ch. 30 - Prob. 3PCh. 30 - Your firm faces a 9% chance of a potential loss of...Ch. 30 - BHP Billiton is the worlds largest mining firm....Ch. 30 - Prob. 6PCh. 30 - Prob. 7PCh. 30 - Prob. 9PCh. 30 - Prob. 10PCh. 30 - Prob. 11PCh. 30 - You have been hired as a risk manager for Acorn...Ch. 30 - Prob. 13PCh. 30 - Prob. 14P
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