Question

A total investment of $ 34,000,000.00 USD for new equipment The equipment had fixed maintenance contracts...

A total investment of $ 34,000,000.00 USD for new equipment

The equipment had fixed maintenance contracts of $ 4,400,000.00 per year

salvage value of $ 7,000,000.00

variable costs were 53 % of revenues.

Increase in working capital of $ 6,000,000.00 and $ 1,200,000.00 of this increase would be offset with accounts payable

The corporate tax rate was 34 %

currently has 1,000,000 shares of stock outstanding at a current price of $ 16.00

also has 30,000 bonds outstanding, with a current price of $ 968.00

The bonds pay interest semi-annually at a coupon rate of 4.70 %

The bonds have a par value of $1,000 and will mature in 21 years

Calculate the new debt and new equity and YTM

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Answer #1

Net debt= number of bonds*price=30,000*$968=$29,040,000

New equity= number of shares outstanding *price=1000000*$16=$16,000,000

YTM can be found using RATE function in EXCEL

=RATE(nper,pmt,pv,fv,type)

nper=number of periods=2*21=42 (semi-annual payments)

Coupon payments=4.7%*$1000=$47

pmt=coupon payment=$47/2 (semi annual coupon payments)=$23.5

pv=current trading price=968

fv=face value=1000

=RATE(42,23.5,-968,1000,0)

RATE=2.47%

Semi-annual YTM=2.47%

Annual YTM=2*2.47%=4.95%

Therefore, YTM=4.95%

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