Question
You start a corporation. Your idea will produce $100K at the end of each year for 20 years. After 20 years you will sell all
You start a corporation. Your idea will produce $100K at the end of each year for 20 years. After 20 years you will sell all assets this will produce an additional $1.2 million at year 20. To begin production you need $500K immediately which you will raise by issuing bonds and stock. You issue a 20 year bond with 4% annual coupon and face value $1 million. YTM on bonds is 14%, stockholders also require 14% return. No cash is retained within the company. a) What are the cash flows produced by the company? What are these worth (assuming 14% annual rate)? b) What are cash flows to bondholders? What is the bond worth today? c) What are the cash flows to owners? What is ownership worth today? d) What percent of ownership in your company must you sell today?
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