Harp and Lyre is an investment firm specialising in corporate advice, particularly in regard to raising finance and company valuation. One of its clients, Imbroglio Ltd, has approached Harp and Lyre seeking advice and assistance. Question 1 Imbroglio Ltd is a large company listed on the Australian Stock Exchange. It is a diversified company with manufacturing and trading divisions operating in a number of industries. Imbroglio has recently developed a new product which is the first of its kind and which is expected to make a significant contribution to the company's future earnings. Imbroglio needs additional finance to bring the product to market. The company is seeking to raise $20 million in debt finance through a bond issue. Imbroglio would like to issue bonds with a face value of $1000, a maturity of 20 years and an 8 per cent annual coupon rate. Interest would be paid semi-annually. Imbroglio is considering offering an 8 per cent coupon because it is not sure what rating its bonds would receive. Harp and Lyre has advised that similar bonds with an AA rating currently have a yield to maturity of 7.5 per cent and similar bonds with an A rating have a yield to maturity of 8.5 per cent. Required:

(a) Calculate the price of the bonds, and the number of bonds Imbroglio would need to issue, if the company was to receive an AA rating?

(b) Calculate the price of the bonds, and the number of bonds Imbroglio would need to issue, if the company was to receive an A rating?