Global Exporters wants to raise $31 million to expand its business. To accomplish this, it plans to sell 20-year, $1,000 face va
1 answer:
Answer:
Min number required = 36742.44878 rounded off to 36743 bonds
Explanation:
To calculate the minimum number of bonds that must be sold, we first need to calculate the bonds price.
To calculate the price of the bond today, we will use the formula for the price of the bond. We assume that the interest rate provided is stated in annual terms. As the bond is a semi annual bond, the coupon payment, number of periods and semi annual YTM will be,
Coupon Payment (C) = 1,000 * 0.062 * 6/12 = $31
Total periods (n) = 20 * 2 = 40
r or YTM = 0.0775 * 6/12 = 0.03875 or 3.875%
The formula to calculate the price of the bonds today is attached.
Bond Price = 31 * [( 1 - (1+0.03875)^-40) / 0.03875] + 1000 / (1+0.03875)^40
Bond Price = $843.7107767 rounded off to $843.71
The bonds will sell at a price of $843.71 today.
So the minimum number of bonds that must be sold is,
Min number required = 31,000,000 / 843.7107767
Min number required = 36742.44878 rounded off to 36743 bonds
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Answer:
a) 9.00 %
b) 7.80 %
c) yes the weight of the debt increases here is more risk in the investment as the debt payment are mandatory and failing to do so result in bankruptcy while the stock can wait to receive dividends if the income statement are good enough
d) 9.00 %
e) The increase in debt may lñead to an increase in return of the stockholders if they consider the stock riskier than before and will raise their return until the WACC equalize at the initial point beforethe trade-off occurs
Explanation:
a)
Ke 0.12
Equity weight 0.5
Kd(1-t) = after tax cost of debt = 0.06
Debt Weight = 0.5
WACC 9.00000%
c)
Ke 0.12
Equity weight 0.3
Kd(1-t) = after tax cost of debt = 0.06
Debt Weight 0.7
WACC 7.80000%
d)
<em>Ke 0.16</em>
Equity weight 0.3
Kd(1-t) = after tax cost of debt = 0.06
Debt Weight 0.7
WACC 9.00000%