Question
Readable Materials Inc., a manufacturer of coated freshet and coated ground-wood paper used in catalogs, magazines, and commercial printing applications, has three bond issues outstanding.
Readable Materials Inc., a manufacturer of coated freshet and coated ground-wood paper used in catalogs, magazines, and commercial printing applications, has three bond issues outstanding. The following table describes the data of bonds.
| Issue A | Issue B | Issue C | |
| Price | $950.00 | $1,150.00 | $900.00 |
| Face Value | $1,000.00 | $1,000.00 | $1,000.00 |
| Coupon Rate | 6.00% | 7.00% | 8.00% |
| Frequency (annual, semi-annual or quarterly coupon) | 2 | 1 | 4 |
| Maturity (Years) | 15 | 20 | 30 |
| Number of Bonds | 1,000 | 2,000 | 3,000 |
| Par Value (Amount Outstanding) | 1,000,000 | 2,000,000 | 3,000,000 |
In addition, the current price per share of the firms 200,000 shares of common stock is $30, but they have book value of $20 per share. The firm pays annual dividend with the dividend information in the following table. The firm expects an average common dividend growth rate of 3% indefinitely.
| Year | Dividend |
| 2013 | 1.004 |
| 2014 | 1.040 |
| 2015 | 1.060 |
| 2016 | 1.090 |
| 2017 | 1.140 |
| 2018 | 1.180 |
The firms beta coefficient is 1.5 and its marginal tax rate is 21%. If the current risk free rate and market risk premium are 3% and 5.5% respectively, answer the following:
1) What are the yield to maturity for each bond issue? Hint: You can use either RATE function or YIELD function to calculate the yield to maturity. To use RATE function, please pay attention to the frequency of coupon payments, i.e., annual, semi-annual or quarterly. To use the YIELD function, you can assume any current date as settlement date and enter maturity date according to the number of maturity years.
Answer:
| Issue A | Issue B | Issue C | |
| Yield to Maturity | % | % |
Format the result in percentages and with two decimal places.
2) What is the weighted pre-tax cost of debt using market value weights?
Answer: %
Format the result in percentages and with two decimal places.
3) Use TREND function to forecast the growth rate of dividend for 2019 (TREND growth rate), and assume the dividend is expected to grow at this rate indefinitely. Use this forecasted growth rate to calculate the dividend amount forecast in 2019.
Answer: $
Format the result with three decimal places.
4) Use the arithmetic average of the dividend discount model and CAPM model for the cost of common stock, what is the average cost of common stocks?
Answer: %
Format the result in percentages and with two decimal places.
5) What is the weighted average cost of capital?
Answer: %
Format the result in percentages and with two decimal places.
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Numerical Methods In Finance
Authors: René Carmona, Pierre Del Moral, Peng Hu, Nadia Oudjane
2012th Edition
3642257453, 978-3642257452
