Question

Additional Information for All Question: Return on market is 10%, return on T-bills is 4%, and companies pay 40 % corporate tax and 30 % capital gains tax. For Q1- Q2: Greenleaf Inc. is a newly incorporated firm that requires $500 million in capital; and is one of two options raising capital through debt and equity only. The firm is comparing on capital raising Option A: The firm raises $200million through issuing bonds and $300 million through issuing 600,000 (0.6million) ordinary shares. Each bond offers a semi annual coupons of $26.0485, has a par value of $200, matures in 10 years, and offers a YTM of 10 % to its investors. The firm is to offer an expected dividend of $0 at the end of the first year, and offers ordinary shareholders a return of 14.92% per year. Option B: The firm raises a total of $500 million by issuing 1 million bonds and 500,000 (0.5million) ordinary shares. Each bond costs $250, offers semiannual coupons, has a par value of $200, matures in 10 years, and offer a YTM of 11% to its investors. Each ordinary share costs $500 Q1. (a) Option A: Calculate the price of each bond and the number of bonds that need to be issued to raise $200 million. (b) Option B: Calculate the price of each share, and hence, the expected dividend $0 (correct to 4 decimal prices) at the end of the first year. (C) Option C: Calculate the coupon rate offered to bond Investors.

(c) option c is both of option a and b

Calculate the coupon rate offered to bond Investors both of option a and b

Answer 1

1 a) Option A Coupon 26.0485 Par value 200.00 10 yrs Maturity 10% YTM $400.00-PV(10%/2,10*2,26.0485,200,) Price Nos. of bonds 500000.27 b) Price of share Option B 500 14.92% Re Dividend 74.6 c) Coupon rate for option 1 26.0485 2/200 26.05% Coupon rate for option 2 PMT(11%/2, 20, - 250, 200, ) $15.18 Coupon 15.18% Coupon rate m