Week 6Cotton On Ltd. currently has the following capital structure:Debt: $3,500,000 par value of outstanding bond that pays annually 10% coupon rate with an annualbefore-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20years.Ordinary shares: $5,500,000 book value of outstanding ordinary shares. Nominal value of each shareis $100. The firm plan just paid a $8.50 dividend per share. The firm is maintaining 4% annual growthrate in dividends, which is expected to continue indefinitely.Preferred shares: 45,000 outstanding preferred shares with face value of $100, paying fixed dividendrate of 12%.The firm's marginal tax rate is 30%.Required:a) Calculate the current price of the corporate bond? (iq zni.b) Calculate the current price of the ordinary share if the average return of the shares in the sameindustry is 9%? a TheTc) Calculate the current price of the preferred share if the average return of the shares in the sameindustry is 10% 9ɔ161

A bond is a type of loan contract between an issuer (the seller of the bond) and a holder (the…

Answered: Week 6 Cotton On Ltd. currently has the…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter11: The Cost Of Capital

Section: Chapter Questions

Problem 1PROB

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Debt: $3,500,000 par value of outstanding bond that pays annually 10% coupon rate with an annualbefore-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20years.Ordinary shares: $5,500,000 book value of outstanding ordinary shares. Nominal value of each shareis $100. The firm plan just paid a $8.50 dividend per share. The firm is maintaining 4% annual growthrate in dividends, which is expected to continue indefinitely.Preferred shares: 45,000 outstanding preferred shares with face value of $100, paying fixed dividendrate of 12%.The firm's marginal tax rate is 30%. Calculate the current price of the preferred share if the average return of the shares in the sameindustry is 10%
Week 6 Cotton On Ltd. currently has the following capital structure: Debt: $3,500,000 par value of outstanding bond that pays annually 10% coupon rate with an annual before-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20 years. Ordinary shares: $5,500,000 book value of outstanding ordinary shares. Nominal value of each share is $100. The firm plan just paid a $8.50 dividend per share. The firm is maintaining 4% annual growth rate in dividends, which is expected to continue indefinitely. Preferred shares: 45,000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 12%. The firm's marginal tax rate is 30%. Required: a) Calculate the current price of the corporate bond? b) Calculate the current price of the ordinary share if the average return of the shares in the same industry is 9%? c) Calculate the current price of the preferred share if the average return of the shares in the same industry is 10%
Assume the firm’s stock now sells for $30 pershare. The company wants to raise $20million by issuing 20-year, annual interest, $1,000 par value bonds. Each bond will have 40 warrants attached,each exercisable into 1 share of stock at an exercise price of $36. The firms straight bonds yield 8%. Each warrant is expected to have a marketvalue of $0.75 when the stock sells at $30.The company wants to establish a coupon interest rate and dollar couponto ensure that the bonds will clear the market. a.Calculate the value of the debt portion of the bonds with warrants.Stock price $30 Bonds-life and par value 20Par value $1,000 # of warrants per bond40Exercise price $36Warrant market value @ P=$30) $0.75Yield on straight bonds 8% b.Calculate the dollar coupon amount per bond with warrants..Calculate the coupon interest rate that should be set on the bonds withwarrants.d.Identify 3 advantages to the company of issuing a bond with warrantsinstead of straight bonds.e.Identify 3 advantages to the…
Debt: $3,500,000 par value of the outstanding bond that pays annually 10% coupon rate with an annual before-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20 years. Ordinary shares: $5,500,000 book value of outstanding ordinary shares. Nominal value of each share is $100. The firm plan just paid an $8.50 dividend per share. The firm is maintaining 4% annual growth rate in dividends, which is expected to continue indefinitely. Preferred shares: 45,000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 12%. The firm's marginal tax rate is 30%. Required: Calculate the current price of the corporate bond? Calculate the current price of the ordinary share if the average return of the shares in the same industry is 9%? Calculate the current price of the preferred share if the average return of the shares in the same industry is 10%
Debt: $3,500,000 par value of outstanding bond that pays annually 10% coupon rate with an annual before-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20 years. Ordinary shares: $5,500,000 book value of outstanding ordinary shares. Nominal value of each share is $100. The firm plan just paid a $8.50 dividend per share. The firm is maintaining 4% annual growth rate in dividends, which is expected to continue indefinitely. Preferred shares: 45,000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 12%.Calculate the current price of the preferred share if the average return of the shares in the same industry is 10%
Debt: $3,500,000 par value of outstanding bond that pays annually 10% coupon rate with an annual before-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20 years. Ordinary shares: $5,500,000 book value of outstanding ordinary shares. Nominal value of each share is $100. The firm plan just paid a $8.50 dividend per share. The firm is maintaining 4% annual growth rate in dividends, which is expected to continue indefinitely. Preferred shares: 45,000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 12%. The firm's marginal tax rate is 30%. Required: a) Calculate the current price of the corporate bond?
aline5 FDX Co. would like to raise $15 million to invest in capital expenditures. The company plans to issue five- year bonds with a face value of $1000 and a coupon rate of 8.55% (annual payments). The following table summarizes the yield to maturity for five-year (annual-pay) coupon corporate bonds of various ratings: Са Ratings YTM Aaa Aa A 2.78% Ва 3.19% Ва В 2.59% 2.65% 4.46% 5.88% 8.55% (1) Assuming the bonds are rated "B", what will the price of the bonds be? (2) How much total principal amount of these bonds must FDX issue to raise $15 million today, assuming the bonds are “B" rated? (Because FDX cannot issue a fraction of a bond, assume that all fractions are rounded to the nearest whole number which is higher.) (3) Suppose that when the bonds are issued, the price of each bond is equal $1179.75. What is the likely What must the rating of the bonds be for them to sell at par? (4) rating of the bonds? Are they junk bonds?
A company is going to undertake an issue of $100 million of high yield bonds, with a maturity of 5 years. The bonds are rated BB. The coupon on the bonds is 5%, paid semi-annually. The underwriter is charging a commission of 2%. What is the effective yield on the bonds, from the company's point of view? Group of answer choices 5.46 % 7.00% 5.75% 2.73%
A firm has an issue of $1,000 par value bonds with a 12 percent stated interest rate outstanding. The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's bond will sell for ________ today. a. $1,115.50 b. $1,000 c. $1,268.40 d. $805.20
Sun System Incorporated is issuing 20-year $1 000 face value 10% annual coupon bonds to finance its operations over the medium to long-term. a. If interest is paid annually, what is the value of the firm’s bond when the required rate of return is 8% and 12%? b. Indicate, for each case at i. above, whether the bond is selling at a discount or at a premium. c. If the bond pays interest at 8% semi-annually, what would be the current price of the bond? d. If bonds are sold for $850, what will be the approximate yield to maturity of the bonds? What is the effective annual yield on the bonds?
1) HMK Enterprises would like to raise $10.0 million to invest in capital expenditures. The company plans to issue five-year $1,000 bonds with a face value of and a coupon rate of 6.58% (annual payments). 6 The following table summarizes the yield to maturity for five-year (annual-payment) coupon corporate bonds of various ratings: Rating AAA AA A BBB BB YTM 6.13% 6.36% 6.52% 6.94% 7.55% Assuming the bonds will be rated AA, what will be the price of the bonds?
A firm issues a $10 million bond with a 7% coupon rate, 4 year maturity, and annual interest payments when market interest rates are 6%. If the market rate changes to 8% and the bonds are carried at amortized cost, the book value of the bonds at the end of the first year will be: $10,262,432 $9,742,290 $10,267,301

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