Long-term Debt Bonds: Par $100, semi-annual coupon 14% p.a., 6 yrs to maturity - Bonds...
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Accounting
Long-term Debt Bonds: Par $100, semi-annual coupon 14% p.a., 6 yrs to maturity - Bonds = 1,000,000
Equity Preference Shares: Par $10, annual dividend 60 cents per share - Preference = $100,000
Ordinary Shares: 1 million issued - $2,000,000
Total = $3,100,000
From the financial markets, your client has ascertained the following:
Yield to maturity on 6 yr Entroc Ltd. corporate bonds: 6% p.a.
The required return on Entroc Ltd. preference shares: 9% p.a. Entroc Ltd. ordinary shares last dividend declared: $0.20 Forecast future growth rate of Entroc Ltd. ordinary share dividend: 5% p.a.
The required return on Entroc Ltd. ordinary shares: 12% p.a. Required:
(a) Calculate the intrinsic/market valuation on 31 March 2023 of one Entroc Ltd.:
(i) bond
(ii) preference share
(iii) ordinary share.
(b)Calculate the total intrinsic/market valuation on 31 March 2023 of EntrocLtds:
(i) Long-term debt
(ii) preference shares
(iii) ordinary shares.
(c) Compare the book and market values for each of the long-term sources of finance currently used by Entroc Ltd. and briefly explain why any differences that your client observes have occurred.
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