Your company has 50 million shares tradingat a price of $80, and perpetual debt withface value of $2.5 billion and coupon rate10%. The debt is rated AA and has a yield of12.5%. There is a proposal to issue anadditional $1 billion of equal-seniorityperpetual debt, and use the proceeds tobuy back equity. However, this is expectedto lower the bond rating to A-, which wouldraise the yield to 13.5%. If you go aheadwith the change, the wealth transfer fromwould amount to

A Bond refers to a concept that is defined as an instrument that represents the loan being made by…

Answered: Your company has 50 million shares…

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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Doha plc has some surplus funds that it wishes to invest in bonds. The company requires a return of 15% on bonds, and the finance director has asked you to analyse whether it should invest in either of the following bonds that are available:Company A: Expected profit 12% bonds, redeemable at par at the end of two more years, with a current market value of QAR 95 per QAR 100 bondCompany B: Expected profit 8% bonds, redeemable at QAR110 at the end of two more years, with a current market value of QAR 95 per QAR 100 bonda. Calculate the expected value (price) of the two bonds and evaluate if either offer an appropriate return for Doha Plc.b. Critically evaluate what would be the impact on the price of bonds if Doha Plc reduces their required return.c. Critically evaluate and discuss the factors that should be considered by the directors of a company when choosing whether to use debt or equity finance for a new projectd. Recently one director has attended a finance conference, on their…
MLK Bank has an asset portfolio that consists of $120 million of 15-year, 12-percent-coupon, $1,000 bonds with annual coupon payments that sell at par. a-1. What will be the bonds’ new prices if market yields change immediately by ± 0.10 percent? (Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16)) Bonds’ New Price At + 0.10% $ At − 0.10% a-2. What will be the new prices if market yields change immediately by ± 2.00 percent? (Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16)) Bonds’ New Price At + 2.0% $ At − 2.0% b-1. The duration of these bonds is 7.6282 years. What are the predicted bond prices in each of the four cases using the duration rule? (Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16)) Bonds’ New Price…
Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. Using the pretax cost of debt from Question 7, what is the cost of equity, RS?
Apel Investment Company has GH¢1,800,000 of interest-bearing bond outstanding. Theoutstanding bonds have a 11% coupon and a 14% yield to maturity. Management believesthey could issue new bonds at a premium of 105% that would provide a similar yield tomaturity. Also, the company’s prepared stock currently stands at GH¢1,200,000 and tradesat GH¢60.00 per share. The company pays a dividend of GH¢3.00 per share. Furthermore,the company’s common stock sells for GH¢15.00 per share with 200,000 shares in issue.The company has a beta of 1.2, whiles the government’s T-Bill has an interest rate of 12%,with a 18% average return on the market. The company’s marginal tax rate is 40%.Management is considering investing in a new project, the details of which are as follows:GH¢Project cost 2,000,000.00Estimated net profit:Year 1 (22,000.00)Year 2 192,000.00Year 3 300,000.00Year 4 270,000.00Year 5 180,000.00Additional information; Depreciation is based on the straight line method. The estimated…
Apel Investment Company has GH¢1,800,000 of interest-bearing bond outstanding. Theoutstanding bonds have a 11% coupon and a 14% yield to maturity. Management believesthey could issue new bonds at a premium of 105% that would provide a similar yield tomaturity. Also, the company’s prepared stock currently stands at GH¢1,200,000 and tradesat GH¢60.00 per share. The company pays a dividend of GH¢3.00 per share. Furthermore,the company’s common stock sells for GH¢15.00 per share with 200,000 shares in issue.The company has a beta of 1.2, whiles the government’s T-Bill has an interest rate of 12%,with a 18% average return on the market. The company’s marginal tax rate is 40%.Management is considering investing in a new project, the details of which are as follows:GH¢Project cost 2,000,000.00Estimated net profit:Year 1 (22,000.00)Year 2 192,000.00Year 3 300,000.00Year 4 270,000.00Year 5 180,000.00Additional information; Depreciation is based on the straight line method. The estimated…
McCue Inc's bonds currently sell for $1, 063They pay a $80 annual coupon, have a 28-year maturity, and a $1,000 par value, but they can be called in 3 years at $1, 080Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the from the YTM it is possible to get a negative answer.) -0.26% -0.46% 5-0.56%-0.16%-0.36%
Innovative Inventions, Inc. needs to raise €10 million. If the company chooses to issuezero-coupon bonds, its debt-to-equity ratio will most likely :A . rise as the maturity date approaches.B . decline as the maturity date approaches.C . remain constant throughout the life of the bond.
MeCue Inc.'s bonds currently sell for $1,045. They pay an $80 annual coupon, have a 10-year maturity, and a $1,000 par value, but they can be called in 4 years at $1,115. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM; it is possible to get a negative answer.) a. -2.06 p.p. b. -1.89 p.p. c. -1.77 p.p. d. -2.51 p.p. e, -1.15 p.p.
You are analyzing the cost of debt for a firm. You know that the firm’s 14-year maturity, 8.2 percent coupon bonds are selling at a price of $790.40. The bonds pay interest semiannually. If these bonds are the only debt outstanding for the firm, answer the following questions. - What is the current YTM of the bonds?
Assets, Ic., plans to issue $6 million of bonds with a coupon rate of 11 percent, a par value of $1,000, semiannual coupons, and 15 years to maturity. The current market interest rate on these bonds is 8 percent. In one year, the interest rate on the bonds will be either 12 percent or 8 percent with equal probability. Assume investors are risk- neutral. a. If the bonds are noncallable, what is the price of the bonds today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Price of the bonds b. If the bonds are callable one year from today at $1,060, will their price be greater or less than the price you computed in part (a)? O Greater O Lesser
McCue Inc.’s bonds currently sell for $1,070. They pay a $120 annual coupon, have a 11-year maturity and a $1,000 par value, but they can be called in 4 years at $1,080. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels into the future. What is the difference between this bond’s YTM and its YTC? (Subtract the YTC from the YTM.)
Assets, Inc., plans to issue $5 million of bonds with a coupon rate of 7 percent, a par value of $1,000, semiannual coupons, and 30 years to maturity. The current market interest rate on these bonds is 6 percent. In one year, the interest rate on the bonds will be either 9 percent or 5 percent with equal probability. Assume investors are risk-neutral. a.If the bonds are noncallable, what is the price of the bonds today? b.If the bonds are callable one year from today at $1,080, will their price be greater or less than the price you computed in (a)? Why? please show all work.

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