Question
A Norwegian firm, Flopsy, wants to raise capital. It is offering two options to you, the potential investor. The first option is a bond, at
A Norwegian firm, Flopsy, wants to raise capital. It is offering two options to you, the potential investor. The first option is a bond, at a price 100m NOK. The bond is a straight bond of 10 years, with annual coupon payment of 5m NOK (starting next year) and principal payment of 90m NOK. The second option is that Flopsy offers 1 million shares at a price 100 NOK per share. Flopsy promises to deliver an annual dividend of 3 NOK per share from next year until forever. Assume that Flopsy is a risk-free company (and abstract away from inflation). Would you invest into Flopsy? If so, which of the two investment options do you prefer? Please provide some calculations to justify your answer. You have to find out the appropriate interest rate to use for Flopsy and justify your choice.
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