1. Company Amliba.Inc is considering building a second headquarter in a new city. The new office...

1. Company Amliba.Inc is considering building a second headquarter in a new city. The new office will create 5000 new jobs for the city. So the government is incentivized to support the project.

The company plans to issue $100 million bond with coupon rate of 8%. Coupon will be paid annually and the bond matures in 5 year.

As a form of support, local government guarantee the bond, so the YTM of the bond at issuance is 5%.

Another bond with exactly the same features but without government guarantee is currently trading at a price that generate a YTM of 10%.

Calculate the value of the government guarantee to the firm. (Ignore taxes.)

Expert Solution

The current value to the firm is higher by $20,570,004 if the Government provides the Guarentee.

Thus, the value of the Government Guarentee is $20,570,004

Workings:

Current Value:

jeff jeffy answered 2 years ago

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