Suppose the finance manager of ABC Company suggests either issuing bonds or shares to raise...
80.2K
Verified Solution
Link Copied!
Question
Finance
Suppose the finance manager of ABC Company suggests either issuing bonds or shares to raise capital for the development of an environmental-friendly production technique. Assuming there is no fees or costs for the securities.
(i) Suppose ABC Company plans to issue bonds with $10,000 par value, 7 years of term to maturity, 5.5% coupon to be paid quarterly, investors require 6% of return on the bond with similar risk. Calculate the price of the bonds. Will the bond sell at par, discount or premium? Explain.
(6 marks)
(ii) If ABC Company wants to issue 20-year zero coupon bonds to raise fund for development, suppose the par value of a 20-year zero coupon bond is $20,000, what is the intrinsic value of the bonds if required rate of return is 7.45%? Would it be worth to invest if the price of bond is $4,800? Explain.
(5 marks)
(iii) ABC Company intends to raise fund by issuing shares for development and announces to pay a constant dividend of $1.5 per share. If the required rate of return is 12%, would it be worth to invest if the price of stock is $15? Explain. (4 marks)
(iv) Refer to part (i) to (iii), explain why the investors required rate of return on bonds and stocks are different.
Please just answer the answer iv thank you
Answer & Explanation
Solved by verified expert
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
