Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Another common support from the government is to enhance the credit quality of the clean energy companies. It is essentially one way to reduce the

Another common support from the government is to enhance the credit quality of the clean energy companies. It is essentially one way to reduce the risk of the company and it applies to both stock and bond investment. Let's use the corporate bonds as an example in this question.

Assume the solar energy company plans to issue 10,000 shares of one-year coupon bonds. The face value is $100 per share, and coupon is paid annualy at a rate of 5%. The risk free rate is 2%. The market expected return is 10%. The beta of the company is 0.8. The estimated default probability is 20%, and the recovery rate is 40%. Suppose before the bond issuance, the government provides this company with an additional credit guarantee that the bond investors can receive a recovery of 80% in the event of default. The credit rating agent therefore raises the credit rating from BB to BBB correspondingly for this company.

Please compute the total amount of fund this company can receive from this bond issuance, for both cases with and without the government's support. And then briefly discuss the benefits of the government support to this company. (Note: you just need to type bond price calculation step once.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Freedmans Handbook A Practical Guide To Wealth

Authors: Wilfred Brown, Adrian Tullock

1st Edition

1478748400, 978-1478748403

More Books

Students also viewed these Finance questions