Question

Suppose there is a corporate bond. Its face value is $2000. And the maturity is 4 years. Its coupon is $10 issued at the end of each year. Its price is $1900 right now. The interest rates for bonds and stocks are 2% and 3%, respectively. The market price of stock of this company is $25 right now. And the shares outstanding is 25,000 shares. And the tax rate is 20%. The ratio of debt to equity is 0.2. (30 scores) a. What is the WACC in real term for this firm? b. What are the NPV and the YTM of the bond? c. Suppose the firm is going to repurchase some stocks now. It repurchased 5000 shares from the market at the current price. What is the stock price after the repurchase? d. Suppose the firm is going to split its stock. It is a 2-to-1 split. (a share becomes two.) It requires commission of $ 2000. What is the stock price afterwards? e. Suppose the firm issued cash dividend of $2 per share. What is the price afterwards?

For 2c-2e, the numerators are market value which is the product of market price and shares outstanding. The denominator is the shares outstanding.

for 2c-2e, you only need to concentrate on the change of value and shares outstanding before you compute the value per share as the stock price.

for 2e, you do not need to consider the D0 and D1 here since the price will adjust instantly after the cash dividend in a strongly efficient market.

For 2c, repurchase consumes value and shares outstanding. And stock price comes from firm's value per share.

For 2a, the "in real term" does not mean anything since all the cash flows here are in real term. Besides, you can take the interest rate of bonds and stock as the rd and re in WACC formula. The capital structure comes from the debt-to-equity ratio while the tax rate is given.

Answer 1