Question
Gamers Inc. is a public listed company in the videogame industry. The company needs $20 million to expand its facilities and is considering to raise
Gamers Inc. is a public listed company in the videogame industry. The company needs $20 million to expand its facilities and is considering to raise this amount by way of selling either shares or bonds. The beta of the company's stock is estimated at 1.2 and investors will receive a dividend per share of $0.50 next year, which is expected to grow at a rate of 1% p.a. afterwards. Gamers Inc. could instead issue bonds maturing in 10 years with a face value of $1,000 and paying semi-annual dividends with a coupon rate of 5% p.a.
(a) If the risk-free rate is 1% p.a. and the expected market return is 10% p.a., how many shares would Gamers Inc. need to sell in order to raise the amount required?
(b) If the yield to maturity of bonds with similar risk characteristics to that of Gamers Inc. is 8% p.a. compounded annually, how many bonds would Gamers Inc. need to issue in order to raise the amount required?
(c) As there is currently low inflation, the central bank has decreased their target interest rates. This has lead to yields at all maturities to decrease by 1% p.a. concurrently. How many more/less bonds do Gamers Inc. have to issue to raise the same amount of money as a result?
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