Security Valuation

X_CO International has two bonds issues outstanding as well as common stock. As of August 1, 2015, the first bond issue has the following attributes:

- It matures in exactly 12 years.

- It has a coupon rate of 7%, with interest paid semi-annually.

- The most recent interest payment was made on July 31, 2015. The next is scheduled for January 31, 2016.

- The bonds face value is $1,000. The total BV at issuance was $200 million.

- On August 1, 2015 the bond had a market price of $1,041.22

As of August 1, 2015, the second bond issue has the following attributes:

- It matures in exactly 17 years.

- It has a coupon rate of 8.5%, with interest paid semi-annually.

- The most recent interest payment was made on July 31, 2015. The next is scheduled for January 31, 2016.

- The bonds face value is $1,000. The total BV at issuance was $250 million.

- The bond is priced to have a yield-to-maturity of 7%.

X_COs common stock currently sells for $17.33 per share. The company recently paid an annual dividend of $1.00 per share. Analysts assume the dividend will grow at an annual perpetual rate of 4%. There are 40 million shares of stock outstanding.

QUESTIONS:

1. Find the YTM of the 7% bonds. Find the current market price of the 8.5% bonds. Find the required rate of return investors are applying to the companys common stock. Post the Excel functions you used to solve for these values.

2. Suppose that market rates rise, so the required rate of return on all these securities increases by 1% (100 basis points). How does that affect the prices of the two bonds and the common stock? Post the Excel functions you used to solve for these values.

3. Starting with the original situations (Part A) suppose that an investor buys the 7.0% bond for $1,041.22 on August 1, 2015. The bond has exactly three years of protection from being called remaining. That means that if interest rates fall, the company can now issue cheaper debt and repay this more expensive debt. Usually for several years after the call protect expires, the company must pay a call premium. This acts as a slight bonus for investors who will have their bonds repaid, but have to reinvest those funds in a low interest rate market. Suppose that the investor is concerned about the bond being called as soon as the call protection expires (in exactly 3 years). What would her yield-to-call (YTC) be if the bond is called in exactly 3 years and the call premium is a pay-off of $1,100 instead of $1,000? Post the Excel function you used to solve for this rate.