Calculate the current price of the corporate bond?

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
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QUESTION 4A
Black Gold Ltd. currently has the following capital structure:
Debt funding: A callable bond that pays annually 10.5% coupon rate with an annual before-tax
yield to maturity of 9.7%. The bond issue has face value of $1,000 and will mature in 16 years.
Ordinary equity funding: An ordinary share that just paid a $6.50 dividend per share in the
current financial year. The firm is maintaining 4.5% annual growth rate in dividend, which is
expected to continue indefinitely.
Hybrid - funding: A preferred share with face value of $100, paying fixed dividend rate of 15%.
Required:
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 11.5%?
c) Calculate the current value of the preferred share if the average return of the preferred
shares in the same industry is 12.5%?*
Transcribed Image Text:QUESTION 4A Black Gold Ltd. currently has the following capital structure: Debt funding: A callable bond that pays annually 10.5% coupon rate with an annual before-tax yield to maturity of 9.7%. The bond issue has face value of $1,000 and will mature in 16 years. Ordinary equity funding: An ordinary share that just paid a $6.50 dividend per share in the current financial year. The firm is maintaining 4.5% annual growth rate in dividend, which is expected to continue indefinitely. Hybrid - funding: A preferred share with face value of $100, paying fixed dividend rate of 15%. Required: 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 11.5%? c) Calculate the current value of the preferred share if the average return of the preferred shares in the same industry is 12.5%?*
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