Let's return to Chattingham Industries. Recall Chattingham has a debt-equity ratio of 60 percent which it considers optimal. The following market data on Chattingham's securities is current: 200,000 bonds with a coupon rate of 5.8 percent outstanding, 25 years to maturity, selling for 106 percent of par; $1,000 par value each and make semiannual payments. 5 million shares outstanding, selling for $66 per share; the stock beta is 1.15. 7 percent market risk premium; 3.1 percent risk-free rate. Net income for the most recent year was $10 million, and is expected to increase by 10 percent next year. Further assume yearly net income is expected to increase thereafter by 5 percent. Chattingham expects to maintain its dividend payout ratio of 40 percent on the 5 million shares of common stock outstanding. Chattingham's tax rate is 30 percent. a. Determine the required return on Chattingham's levered equity. Debt: Common stock: Market: b. Determine the value of Chattingham Industries and then, based off of this value, determine the value of a) the company's equity and b) the company's debt. Clearly show your work.
Let's return to Chattingham Industries. Recall Chattingham has a debt-equity ratio of 60 percent which it considers optimal. The following market data on Chattingham's securities is current: 200,000 bonds with a coupon rate of 5.8 percent outstanding, 25 years to maturity, selling for 106 percent of par; $1,000 par value each and make semiannual payments. 5 million shares outstanding, selling for $66 per share; the stock beta is 1.15. 7 percent market risk premium; 3.1 percent risk-free rate. Net income for the most recent year was $10 million, and is expected to increase by 10 percent next year. Further assume yearly net income is expected to increase thereafter by 5 percent. Chattingham expects to maintain its dividend payout ratio of 40 percent on the 5 million shares of common stock outstanding. Chattingham's tax rate is 30 percent. a. Determine the required return on Chattingham's levered equity. Debt: Common stock: Market: b. Determine the value of Chattingham Industries and then, based off of this value, determine the value of a) the company's equity and b) the company's debt. Clearly show your work.
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:Let's return to Chattingham Industries. Recall Chattingham has a debt-equity ratio of 60 percent which it
considers optimal.
The following market data on Chattingham's securities is current:
200,000 bonds with a coupon rate of 5.8 percent outstanding, 25 years to maturity, selling
for 106 percent of par; $1,000 par value each and make semiannual payments.
5 million shares outstanding, selling for $66 per share; the stock beta is 1.15.
7 percent market risk premium; 3.1 percent risk-free rate.
Net income for the most recent year was $10 million, and is expected to increase by 10 percent next year.
Further assume yearly net income is expected to increase thereafter by 5 percent. Chattingham expects to
maintain its dividend payout ratio of 40 percent on the 5 million shares of common stock outstanding.
Chattingham's tax rate is 30 percent.
a. Determine the required return on Chattingham's levered equity.
b. Determine the value of Chattingham Industries and then, based off of this value, determine the value of a)
the company's equity and b) the company's debt. Clearly show your work.
Debt:
Common
stock:
Market:
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