Silver Limited, a company that generates electricity using biomass, issued 15,000 bonds three years ago with the following details: $1,000 par value, 7% coupon paid twice a year, and 10 years to maturity. Last year, the company paid out a $4.00 dividend per share, which is expected to grow at 5% annually for the next four years. After that, due to the shift towards cleaner energy, the dividend is projected to decrease by 3% each year indefinitely. Currently, their shares are trading at $35, and the risk-free rate is 4%. The discount rates for the company’s bonds and shares are 9% and 15%, respectively. How would you evaluate the current market value of these bonds? Also, what could happen to their price if a call provision was included and their credit rating improved from Baa to A? No calculations needed—just a brief discussion. Lastly, based on some calculations, would you consider investing in their stock today?
Silver Limited, a company that generates electricity using biomass, issued 15,000 bonds three years ago with the following details: $1,000 par value, 7% coupon paid twice a year, and 10 years to maturity. Last year, the company paid out a $4.00 dividend per share, which is expected to grow at 5% annually for the next four years. After that, due to the shift towards cleaner energy, the dividend is projected to decrease by 3% each year indefinitely.
Currently, their shares are trading at $35, and the risk-free rate is 4%. The discount rates for the company’s bonds and shares are 9% and 15%, respectively.
How would you evaluate the current market value of these bonds? Also, what could happen to their price if a call provision was included and their credit rating improved from Baa to A? No calculations needed—just a brief discussion. Lastly, based on some calculations, would you consider investing in their stock today?
Step by step
Solved in 2 steps
