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ABC Ltd. have proposed a debenture issue of $250 million and use the funds to pay...

ABC Ltd. have proposed a debenture issue of $250 million and use the funds to pay down existing debt which carries a significantly higher rate of interest. They plan to offer debentures with a term of seven years. The current rate of interest for equivalent risk debentures is 2.5%. On the date of issue, the market rate for equivalent risk securities has crept up slightly to 3%.

Required.

How much will Lachlan receive from a successful issue?

Solutions

Expert Solution

ABCL will receive the PV of the future expected cash flows from the issue, when discounted ar the market rate of 3% =
=250000000/1.03^7+250000000*2.5%*(1.03^7-1)/(0.03*1.03^7) = $     242,212,146

ekkarill92 answered 2 years ago
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