The minimum required return by Cross-Ocean’s debtholders. 2. The minimum required return by Cross-Ocean’s common shareholders 3. The minimum required return by Cross-Ocean’s preferred shareholders .
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Question 2
Cross-Ocean Boats Ltd. is in the 30% tax bracket. It is interested in determining the minimum return that its stakeholders (investors) will accept. Since you have applied for an internship with them, they have assigned this task to you.
To get started with your work, you compile some information as follows:
1. Cross-Oceans has 3000, 6% semi-annual coupon bonds outstanding. These bonds will mature in 12 years and they sell for 80% of their par value as of now.
2. The firm is also partly equity financed. It has 100,000 outstanding common shares and 19,000 shares of preferred stock. The common shares command a market price of $55 per share and the beta of Cross-Ocean stock is 1.20.
3. The risk-free rate is 4% and the market risk premium is 6%
Armed with this information, compute:
1. The minimum required return by Cross-Ocean’s debtholders.
2. The minimum required return by Cross-Ocean’s common shareholders
3. The minimum required return by Cross-Ocean’s preferred shareholders .
4. The overall minimum required return for Cross-Ocean’s stakeholders.
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