DEBT FINANCING

1.The price of several bonds with face values of $1,000 are summarized in the following table:

Bond A B C D

Price $972.50 $1,1,50.00 $1,040.75 $1,1,50.00

For each bond, state whether it is trades at discount, par or at premium.

2.Suppose a seven-year, $100,000 bond with an 8% coupon rate and semi-annual coupon is trading with a yield to maturity of 6.75%. Calculate the price of the bond. Is the bond trades at discount, par or at premium?

3.Suppose GM Motor Corp issues a bond with 10 years until maturity, face value of the bond is $1,000,000, a coupon rate of 7% (semi annual payments). The yield to maturity of this bond when it was issued was 6%. What was the price of this bond when it was issued?

4.Consider three 30 year bonds with annual coupon payments. One bond has a 10% coupon rate, one has 5% coupon rate, and one has a 3% coupon rate.If the yield to maturity of each bond is 5%, what is the price of each bond per $1,000 face value? Which bond trades at a premium, which bond trades at a discount, and which trades at par?

5.Consider a 30 year, zero-coupon bond with a yield to maturity of 5%. If the bond is issued with a face value of $1,000.

i.Calculate the price of the bond

ii.Suppose interest rate suddenly rise so that investors now demand a 6% yield to maturity before they invest in this bond. Calculate the price of the bond now with the new yield.

iii.What can you conclude from the above relationship of the interest rate/bond yields to price of bond?

PAYOUT POLICY

1.EJH Company has a market capitalization of $1 billion and 20 million shares outstanding. It plans to distribute $100 million through an open market repurchase. Assuming perfect capital market:

i.What will the price of EJH be right before the repurchase?

ii.How many share will be repurchase?

iii.What will the price per share of EJH be right after repurchase?

2.Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 million shares outstanding with a current market price of $15 per share. Natsam board has decided to pay out this cash as a one-time dividend assuming unlevered cost of capital of 3.44 percent. The firm expect to generate same amount of free cash flows in subsequent year. Assuming perfect capital market:

i.What is the ex-dividend price of the share?

ii.If the board instead decided to use the cash to do one time share repurchase, what is the price of the share once repurchase is complete?

iii.In a perfect capital market, which policy paying dividend or share repurchase makes investors in the firm better off?