Question
Highroller Investment Co. wishes to borrow $500 million at 2% yearly interest. Interest payments are made annually. The principal will be repaid at the end
Highroller Investment Co. wishes to borrow $500 million at 2% yearly interest. Interest payments are made annually. The principal will be repaid at the end of 10 years. Investors demand an annual return of 13% on this debt. Highrollers tax rate is 45%.
a. Calculate the face value needed to induce investors to lend $500 million.
b. Calculate the value of ITS received by Highroller.
c. Suppose instead that the debt has a face value of $500 million and a yearly coupon rate of 13%. Principal will be repaid at the end of 10 years. Calculate the value of ITS received by Highroller in this case.
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Intermediate Financial Management
Authors: Eugene F. Brigham, Louis C. Gapenski
4th Edition
0030754828, 978-0030754821
