A company is looking to raise funds by issuing a promissory note with a face value...

A company is looking to raise funds by issuing a promissory note with a face value of $500,000 maturing in 70 days. The current market interest rate is 8% p.a.

What is a promissary note? In your answer explain its distinguishing features and what type of company is likely to use this method to raise capital.

How much would the company receive from this issue?
The company has a minimum target of $490,000 to raise. Based on your answer in (i), should the company issue this promissory note? Why or why not?

(Marks 1 + 1+ 1 = 3)

XYZ company has issued a bond with 25 years of maturity and coupon rate of 10 percent per annum. The face value of the bond is 1 million dollars. The bond makes coupon payments semi-annually. The yield to maturity is 14 percent per annum.

Why might XYZ chose to raise capital this way? In your answer explain what other options are available to the company to raise funds.
What is the price of the bond today? Explain why the price is different to the face value.
A broker has offered this bond for $585,000.00. Would you buy it? Why or why not? (Marks 2 + 1 + 1 = 4)

ABC company has paid an annual dividend of $4 this year. Market forecasting indicates that the annual dividend of ABC is expected to grow as per the annual growth rates shown in the following table. It is also assumed that the fourth year’s growth rate is expected to remain constant in the foreseeable future. The opportunity cost of capital is 12% p.a.

Year	1	2	3	4
Dividend growth rate	5%	7%	6%	6%

Calculate the present value of an ABC share.

A broker offers this share for $40. Would you buy it? Why or why not explain your answer?

Expert Solution

jeff jeffy answered 2 years ago

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