Assets
Current assets $ 31,200,000
Net plant, property, and equipment 124,800,000
Total assets $156,000,000
Liabilities and Equity
Accounts payable $ 11,000,000
Accruals 10,000,000
Current liabilities $ 21,000,000
Long-term debt (45,000 bonds, $1,000 par value) 45,000,000
Total liabilities $ 66,000,000
Common stock (8,000,000 shares) 40,000,000
Retained earnings 50,000,000
Total shareholders' equity 90,000,000
Total liabilities and shareholders' equity $156,000,000
The stock is currently selling for $10 per share. The callable bond price is $1,055 if it is called on year 5 and 15-year of maturity, providing 10% coupon rate with semiannual payments. The beta is 1.90 with risk free rate 5.00% and the current market rate of interest is 8%. The firm's tax rate is 30%.
Requirements:
Vaalue of bond: Present value of coupons+Present value of maturity value
100*9.4268+1000*0.3910=1333.68
YTM: (C(1-t)+(RV-IP)/Number of years)/(RV+IP)/2
100(1-.03)+(1000-1055)/15/(1000+1055)/2
6.45%
Current Yield: Annual Coupon/Current market price
100/1055=9.47%
Cost of equity: Rf+B(Rm-Rf)
5+1.9(8-5)
10.7%
Market Capitalisation: 10*8000000 = 80,000,000
Market value of liabilities: 1055*45,000+21,000,000=68,475,000
Bond is selling at premium since YTM is lower than Coupon.
Capital and financial structure of the company ( Debt Equity ratio): 47,475,000/130,000,000 = 0.365 (36.5% debt and equity of 73.5%. Hence, primarily equity)
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