The Bono firm's annual report provides the following information on its sources of financing:

A bank loan of $600,000 repayable in a series of 284 equal monthly end-of-period installments of $3,000 (take taxes into account in the cost of debt).

2,000 Class A bonds have a par value of $1,000, an annual coupon rate of 14% (coupons are distributed semi-annually) and mature in 12 years. After-tax issue costs are 2%. The market currently demands a nominal yield of 12% for comparable bonds (taking coupon taxes into account).

3,000 Class B bonds, currently trading at $905.53, have a par value of $1,000, an annual coupon rate of 12% (coupons are distributed semi-annually) and mature in 8 years (take coupon taxes into account). After-tax issue costs are 2%.

100,000 preferred shares paying an annual dividend of $1.40 per share, currently trading at $11 per share. After-tax issue costs for these shares are 2%.

1,000,000 shares outstanding, currently trading at $15 each. The variance of the market return is 2.15% and the covariance between the market return and the Bono share return is 1.978%. The T-bill rate is 5% and the market risk premium is 11%. The pre-tax issue costs of these shares are $0.9 per share.

As a junior advisor in a consulting firm, you are asked to estimate Bono's cost of capital, knowing that the weight of each source of financing must be based on its market value and that the company's tax rate is 40%.

 

2. A company needs $3,000,000 to undertake a major investment project.  Currently, the number of shares outstanding is 500,000 and their market price is $39. The company wants to offer its current shareholders the opportunity to finance the project by purchasing shares at $30.

1) How many new shares must be issued?
2) How many rights will be required to purchase one share?
3) What is the intrinsic value of a subscription right?

 

3. ABC Company had outstanding convertible bonds with a par value of $1,000, paying a coupon rate of 11% and maturing in 8 years. These bonds are exchangeable, at the investor's option, for 32 shares of the company, with each share worth $30. The value of the conversion option is equal to $90. Calculate the market value of one of these bonds, knowing that the required nominal rate of return capitalized semi-annually to find its standard value is 12%.