Problem 5 Brett Creative Media Ltd needs to obtain financing for an investment project. The project costs $100 million dollars. Sarah France, the company's CFO, is considering several possible debt securities to issue. Sarah has hired the investment bank, Abelard, Browne, and Coates (ABC), to help her estimate the yield to offer for each financing option. ABC has provided the following information to Sarah. All numbers are on a per annum basis. The company has a Baa rating from Moody's. The default premium for Baa companies is currently 0.6%. Investors require an additional 0.4% if the debt is callable. If the debt has a convertible option, the yield can be lowered by 0.2%. No tax adjustment is needed; however, investors expect a 0.3% liquidity premium. The term structure for US Treasury securities is as follows: 1 year: 4%,3 years: 4.5%,5 years: 5.2%,7 years: 6.3% and 10 years: 7.5% Sarah is considering three possible bonds to issue: (1) 3-year bonds (2) 5-year callable convertible bonds (3) 10-year callable bonds Compute the required yield for each bond Suppose Brett Creative decides to issue 5-year callable convertible bonds. You are an investor interested in the bonds. Compute the after-tax yield of these bonds if you are in the 35%tax bracket