Homework Help is Here – Start Your Trial Now!
Business
Finance
Question 13 What is the market value ($ million) of the outstanding bonds of the firm?

Question 13 What is the market value ($ million) of the outstanding bonds of the firm?

Essentials Of Investments
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
See similar textbooks
icon
Related questions
icon
Concept explainers
Question

7

Answer the next 4 questions based on the following information: • An analyst is valuing Sys Inc. Sys has outstanding bonds of $5 million (face value). The bonds pay an annual coupon of 7%, trade at a yield to maturity of 6%, and have a 10-year maturity. In addition, Sys has a bank loan of $3 million and an amortization period of 2 years. Sys will repay the bank loan completely by the end of next 2 years, and the interest payments for Sys's bank loan in the next 2 years are $97,000 at the end of year 1 and $84,000 at the end of year 2. • Sys's unlevered free cash flows are expected to be $5 million by the end of the first year, and this cash flow will grow at a rate of 5% per year indefinitely. • The company's cost of equity is 20%, and after tax cost of debt is 5%. Tax rate is 30%. Risk free rate is 4%, and historical equity market return = 12%. . Currently, the ratio of debt to firm value is 2.5:4. The analyst predicts that the firm will adopt its target capital structure of debt to firm value of 1:4 after 2 years. The analyst plans to value Sys using a 2-stage model. In the 1st stage (years 1-2), she will use the APV method and in the 2nd stage (year 3 and thereafter), she will use the WACC method.
Transcribed Image Text:Answer the next 4 questions based on the following information: • An analyst is valuing Sys Inc. Sys has outstanding bonds of $5 million (face value). The bonds pay an annual coupon of 7%, trade at a yield to maturity of 6%, and have a 10-year maturity. In addition, Sys has a bank loan of $3 million and an amortization period of 2 years. Sys will repay the bank loan completely by the end of next 2 years, and the interest payments for Sys's bank loan in the next 2 years are $97,000 at the end of year 1 and $84,000 at the end of year 2. • Sys's unlevered free cash flows are expected to be $5 million by the end of the first year, and this cash flow will grow at a rate of 5% per year indefinitely. • The company's cost of equity is 20%, and after tax cost of debt is 5%. Tax rate is 30%. Risk free rate is 4%, and historical equity market return = 12%. . Currently, the ratio of debt to firm value is 2.5:4. The analyst predicts that the firm will adopt its target capital structure of debt to firm value of 1:4 after 2 years. The analyst plans to value Sys using a 2-stage model. In the 1st stage (years 1-2), she will use the APV method and in the 2nd stage (year 3 and thereafter), she will use the WACC method.
Question 13 What is the market value ($ million) of the outstanding bonds of the firm? 5.37 6.22 4.14 4.98
Transcribed Image Text:Question 13 What is the market value ($ million) of the outstanding bonds of the firm? 5.37 6.22 4.14 4.98
Expert Solution
steps

Step by step

Solved in 3 steps with 1 images

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Warrants
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS