Question

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Answer 1

	a)	Current price of Corporate Bond
		Current price =Present Value of cash flows
		Face value of bond	$1,000
	Pmt	Annual dividend =1000*9%	$90
	Rate	Discount Rate =Yield	8%
	Nper	Number of years	15
	FV	Maturity payment	$1,000
	PV	Current Price	$1,085.59	(Using PV function of excel with Rate=8%, Nper=15, Pmt=-90, Fv=-1000)
		ExcelCommand: PV(8%,15,-90,-1000)
	b)	Current Price of ordinary shres
		D1=Next years dividend =$8.50
		g=Dividend growth rate=5%=0.05
		R=Required return =11%=0.11
		P0=Current Price =D1/(R-g)
		P0=8.5/(0.11-0.05)=	$141.67
		Current Price of ordinary shres	$141.67
	c)	Total Market Value:
	Md	Market Value of Debt=$400,000*(1085.59)/1000	$434,238
	Me	Market Value of Equity=60000*$141.67	$8,500,200
	Mt=Md+Me	Total Market Value:	$8,934,438
	d)	Capital Structure
	Wd=Md/Mt	Weight of Debt	0.05
	We=Me/Mt	Weight of Equity	0.95
	e)	Weighted average cost of capital
	Cd	After Tax Cost of debt=8%*(1-Tax Rate)=8%*0.7	5.6%
	Ce	Cost of equity=Required Return	11%
		Weighted average cost of capital=Weight of Debt*Cost of debt +Weight of Equity*Cost of Equity
		Weighted average cost of capital =Wd*Cd+We*Ce
		Weighted average cost of capital =0.05*5.6%+0.95*11%	10.74%