Blooming Ltd. currently has the following capital structure: Debt: $2,500,000 par value of outstanding bond that pays annually 12% coupon rate with anannual before-tax yield to maturity of 10%. The bond issue has face value of $1,000 and will mature in 25 years. Ordinary shares: 65,000 outstandingordinary shares. The firm plans to pay a $7.50 dividend per share in the next financial year. The firm is maintaining 3% annual growth rate in dividend,which is expected to continue indefinitely. Preferred shares: 40 000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 14%.Company tax rate is 30%. Required: Complete the following tasks: a) Calculate the current price of the corporate bond?,market value (rounded off to the nearest whole number) and capital structure of the firm (rounded off to two decimal places). Identify the total weights ofequity funding ( - ) e) Compute the weighted average cost of capital (WACC) under the traditional tax system for the firm, using dividend constantgrowth model for calculation the cost of ordinary equity"d) Calculate the currentNeed the solution of a, d and e parts with mathematical calculations? Thanks

Face Value 1000 Coupon Rate 0.12 Coupon Payment 120 Number of years 25 YTM 0.1 Current…

Answered: Blooming Ltd. currently has the…

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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The following information is available for Blue Ocean Group Ltd.: Debt: Outstanding corporate bond that pays annually 10% coupon rate with an annual before-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20 years. Ordinary shares: Outstanding ordinary shares which just paid a $8.50 dividend per share in the current financial year. The firm is maintaining 4% annual growth rate in dividends, which is expected to continue indefinitely. Green Lagoon is the daughter company of the Blue Ocean Group and has the following capital structure: 50,000 ordinary shares outstanding at a market price of $36 a share. The shares have just paid a $5.84 annual dividend and have a dividend growth rate of 2.8%. 32,000 preference shares with a 8% fixed dividend, outstanding at a market price of $50 a share. The preference shares have a par value of $100. The outstanding bonds have a total face value of $4,500,000. The bonds have face value per bond of $1000…
Blooming Ltd. currently has the following capital structure: Debt: $2,500,000 par value of outstanding bond that pays annually 12% coupon rate with an annual before-tax yield to maturity of 10%. The bond issue has face value of $1,000 and will mature in 25 years. Ordinary shares: 65,000 outstanding ordinary shares. The firm plans to pay a $7.50 dividend per share in the next financial year. The firm is maintaining 3% annual growth rate in dividend, which is expected to continue indefinitely. Preferred shares: 40 000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 149%. Company tax rate is 30%. Required: Complete the following tasks: a) Calculate the current price of the corporate bond? b) Calculate the current price of the ordinary share if the average return of the shares in the same industry is 99%6. c) Calculate the current value of the preferred share if the average retum of the shares in the same industry is 12% d) Calculate the current market…
Blooming Ltd. currently has the following capital structure: Debt: $2,500,000 par value of outstanding bond that pays annually 12% coupon rate with an annual before-tax yield to maturity of 10%. The bond issue has face value of $1,000 and will mature in 25 years. Ordinary shares: 65,000 outstanding ordinary shares. The firm plans to pay a $7.50 dividend per share in the next financial year. The firm is maintaining 3% annual growth rate in dividend, which is expected to continue indefinitely. Preferred shares: 40 000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 14%. Company tax rate is 30%. Required: Complete the following tasks: a) Calculate the current price of the corporate bond? b) Calculate the current price of the ordinary share if the average return of the shares in the same industry is 9%? c) Calculate the current value of the preferred share if the average return of the shares in the same industry is 12% d) Calculate the current market…
Blooming Ltd. currently has the following capital structure: Debt: $2,500,000 par value of outstanding bond that pays annually 12% coupon rate with an annual before-tax yield to maturity of 109%. The bond issue has face value of $1,000 and will mature in 25 years. Ordinary shares: 65,000 outstanding ordinary shares. The firm plans to pay a $7.50 dividend per share in the next financial year. The firm is maintaining 3% annual growth rate in dividend, which is expected to continue indefinitely. Preferred shares: 40 000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 14%. Company tax rate is 30%. Required: Complete the following tasks: 3) Calculate the current price of the corporate bond? b) Calculate the current price of the ordinary share if the average return of the shares in the same industry is 9%: - c) Calculate the current value of the preferred share if the average return of the shares in the same industry is 12% d) Calculate the current market…
Gentrix Inc. has two major sources of financing—common stock and long-term debt. They currently have 1,000,000 shares of stock outstanding, which are trading at a price of $20 per share. Two years ago, they issued $5,000,000 of 20-year debt to the general public at par value. The debt pays an annual coupon of 7%. The coupon is paid annually. Given their current capital structure, Gentrix has estimated that their cost of equity is 15%. Gentrix faces a marginal tax rate of 40%. It has been exactly two years since Gentrix issued their debt, and interest rates have increased. If the long-term debt is currently having a yield to maturity of 9%, what is the current value of the outstanding debt? Is it selling at a premium or discount to par value? (Remember that coupon payments of 7% are made annually rather than the semiannually.) Based on Gentrix’s current capital structure, what is the firm’s weighted average cost of capital? Assume that Gentrix currently has a capital structure that is…
Osborne Construction currently has the following capital structure: Debt: $20,500,000 paying 9.5% coupon bonds outstanding with 15 years to maturity, an annual before-tax yield to maturity of 8% on a new issue. The bonds currently sell for $1,125 per $1,000 face value. Ordinary Shares: 100,000 shares outstanding currently selling for $45 per share. The company just paid a $3.50 dividend per share and is experiencing a 5% growth rate in dividends, which it expects to continue indefinitely. (Note: The firm's marginal tax rate is 30%.) Required: a) Calculate the current total market value of the company. b) Calculate the capital structure of the company. c) Calculate the weighted average cost of capital (WACC) for the firm. d) Discuss the significance of calculating WACC for this company.

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Face Value	1000
Coupon Rate	0.12
Coupon Payment	120
Number of years	25
YTM	0.1
Current Price of Bond	$1,181.54