Question
Your company plans to raise $100 million to finance its new two-year project by issuing new two-year bonds (with annual coupons and annual compounding). Your
Your company plans to raise $100 million to finance its new two-year project by issuing new two-year bonds (with annual coupons and annual compounding). Your company and its new project are currently considered risk-free. Unfortunately, covenants in the preexisting debt issued during harder times impose restrictions on the amount of new debt. Specifically, if the face value of the new bond issue is below $100 million, your company can promise to pay an annual coupon of up to 5%. However, if the face value of the new issue is between $100 and $110 million, your company can only promise to pay an annual coupon of up to 1% on the entire issue. Your company is not allowed to issue bonds with the face value above $110 million. The zero-coupon yield curve for the next two years is as follows:
Year | Rate |
1 | 5% |
2 | 6% |
Will your company be able to finance this new project?
| a. | My company will be able to raise $100.00 million and will finance the project. |
| b. | My company will be able to raise $99.93 million and will not finance the project. |
| c. | My company will be able to raise $98.21 million and will not finance the project. |
| d. | My company will be able to raise $101.82 million and will finance the project. |
| e. | My company will be able to raise $98.17 million and will not finance the project. |
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