Mark Motel's debt has a face value of $40 million, a coupon rate of 14% (paid semiannually), and expires in 12 years (at t = 12 . The current annual yield-to-maturity (stated) for all bonds of the company is 15%. Mark wishes to conserve cash for the next few years. To do this, Mark decides to issue new equity and use the proceeds to purchase the existing debt at the market price. The current stock price of Mark is $60 and there are 2 million shares outstanding. 1. How many shares should Mark issue to purchase the existing debt? Assume the decision to purchase the bond does not change the stock price. Instead, the company decides to issue a zero-coupon bond that matures at year 5, and use the proceeds to purchase the existing debt at the market price. 2. What is the face value of the zero-coupon bond that Mark needs to issue?
Mark Motel's debt has a face value of $40 million, a
coupon rate of 14% (paid semiannually), and expires in 12
years (at t = 12 . The current annual yield-to-maturity
(stated) for all bonds of the company is 15%.
Mark wishes to conserve cash for the next few years. To do this, Mark decides to issue new equity and use the proceeds to purchase the existing debt at the market price. The current stock price of Mark is $60 and there are 2 million shares outstanding.
1. How many shares should Mark issue to purchase the existing debt? Assume the decision to purchase the bond does not change the stock price.
Instead, the company decides to issue a zero-coupon bond that matures at year 5, and use the proceeds to purchase the existing debt at the market price.
2. What is the face value of the zero-coupon bond that Mark needs to issue?
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