(a) DEVCON Industries is considering issuing a $20,000,000 15-year bond in early 2022, with an annual coupon rate of 4%, and semiannual interest payments. Required: If the company anticipates that the yield to maturity on the date of issue is expected to be 4.5%, given the company's credit ratings and current market conditions, how much would an investor be willing to pay for $1,000 face value of this bond? (b) DEVCON Industries is also considering a Class B issue of its
(a) DEVCON Industries is considering issuing a $20,000,000 15-year bond in early 2022, with an annual coupon rate of 4%, and semiannual interest payments. Required: If the company anticipates that the yield to maturity on the date of issue is expected to be 4.5%, given the company's credit ratings and current market conditions, how much would an investor be willing to pay for $1,000 face value of this bond? (b) DEVCON Industries is also considering a Class B issue of its
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:DEVCON INDUSTRIES LIMITED
Income Statement
For the years ended Dec. 31, 2018 and
2019
2018
2019
s000's
so00's
Sales
900000
1125000
Cost of Goods Sold
300000
306600
Gross Profit
600000
818400
Selling and Administrative Expenses
150000
156000
Depreciation Expense
54000
57000
Advertising Expenses
18000
21000
Earnings Before Interest and Taxes
Interest Expense
378000
584400
3000
3000
Taxable Income
375000
581400
Taxation (35%)
131250
203490
Net Income
243750
377910
Dividends (40%)
97500
151164
Addition to Retained Earnings
146250
226746
Additional Information
Share Price
21
27.3
Ordinary Shares Outstanding
120000000
144000000
DEVCON INDUSTRIES
LIMITED
Statement of Financial
Position
As at Dec. 31, 2018 and 2019
2019
s000's
ASSETS
2018
LIABILITIES & EQUITY
2018
2019
Current Assets
so00's
Current Liabilities
so00's
s000's
Inventories
264000
276000
Accounts Payables
Notes Payables
138000
114000
Accounts Receivables
294000
330000
150900
132654
Cash and Equivalents
210900
270000
288900
246654
768900
876000
Non-current Liabilities
120000
90000
Total Liabilities
408900
336654
Net Fixed Assets
630600
690000
Equity
Common Stock
264000
276000
Retained Earnings
726600
953346
Total Equity
990600
1229346
Total Assets
1399500
1566000
Total Liabilities & Equity
1399500
1566000
Transcribed Image Text:(a) DEVCON Industries is considering issuing a $20,000,000 15-year
bond in early 2022, with an annual coupon rate of 4%, and
semiannual interest payments.
Required:
If the company anticipates that the yield to maturity on the date of
issue is expected to be 4.5%, given the company's credit ratings
and current market conditions, how much would an investor be
willing to pay for $1,000 face value of this bond?
(b) DEVCON Industries is also considering a Class B issue of its
common stock on the market via an Initial Public Offering (IPO)
in late 2021. The company is expected to pay the following
dividends over the next 4 years: $2.00, $3.00, $3.50 and $4.50.
Thereafter, the company is expected to increase dividends by an
annual rate of 6%.
Required: Assuming investors would require a return of 12% on
this riskier type of investment, how much would an investor pay
for this share toda,?
(e) DEVCON Industries is also assiduously finalising the issuance of
its preference shares. The company plans to pay an annual
dividend of $6.20 on each preferred share and anticipates
investors required return to be around 10%.
Required: Compute the price at which DEVCON Industries should
issue these preferred shares.
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