Devon Limited is a company that has issued corporate bonds with a par value of $100...

Devon Limited is a company that has issued corporate bonds with a par value of $100 and a coupon rate of 11%. The Total Statement of Financial Position value of bonds is $50million. The company’s bonds are currently trading at a price of $103. Interest is payable annually in arrears. The maturity date is in four years time. The company has a target capital structure of 25% debt, 15% redeemable preference shares, 10% non-redeemable preference shares, and 50% in ordinary equity financing. Retained earnings and contributed capital amount to $100million. The company has two types of preference shares in issue. There are 0.2 million non-redeemable preference shares which are issued at $100 per share and there are 0.3 million redeemable shares which were also issued at $100 and are redeemable at $100 per share. The maturity date of redeemable shares is in four years’ time. Preference dividends are payable annually in arrears for both issues. Non-redeemable preference shares are currently priced at $107 and the redeemable preference shares are currently priced at $104. The coupon rates are 9% for each issue and coupon payments were recently paid.The company’s beta is 1.20 and the risk free rate is 8%. The market premium is expected to be 5.5%. The corporation tax rate is 28%.

Required:

(a)What is Devon’s after tax cost of debt?

(b)What is the cost of the two types of preference shares?

(c)What is the cost of equity?

(d)What is the company’s weighted average cost of capital?

Solutions

Expert Solution

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

XYZ limited had issued bonds with a par value of Rs. 100 and a coupon rate...

XYZ limited had issued bonds with a par value of Rs. 100 and a coupon rate of 12% p.a. The bond has maturity of 30 months and pays quarterly coupons. Calculate the fair price of the bond if the required rate of return by investors is 8%.

Suppose you are an investor in bonds. Consider a corporate bond with a $100 par value,...

Suppose you are an investor in bonds. Consider a corporate bond with a $100 par value, a 5% coupon paid semi-annual coupon, and five years to maturity. The bond presently yields 3% annually. Suppose that interest rates rise shortly, and the yield on comparable bonds is now 4%. After observing this change, you call your broker Jane for a quote on the bond. Jane shows that the bond price is $105. You quickly realize that there is an arbitrage opportunity...

(a) Trump Limited has an outstanding issue of convertible bonds with $1,000 par value. These bonds...

(a) Trump Limited has an outstanding issue of convertible bonds with $1,000 par value. These bonds are convertible into 50 shares of Ali’s common stock. The convertible bonds have a 10% coupon with 10-year maturity. The yield-to-maturity for a straight bond of similar risk is 8%. i. Calculate the straight bond value of the convertible bond. ii. What is the conversion value of the convertible bond when the market price of Trump’s common stock is $30 per share? iii. If...

Sheridan Energy Company has issued perpetual preferred stock with a stated (par) value of $100 and...

Sheridan Energy Company has issued perpetual preferred stock with a stated (par) value of $100 and a dividend of 7.0 percent. If the required rate of return is 10.00 percent, what is the stock's current market price? (Round answer to 2 decimal places, e.g. 15.25.) Current market price

1..... Bombay Company has issued $1,000 par value bonds that are currently selling for $933.89. The...

1..... Bombay Company has issued $1,000 par value bonds that are currently selling for $933.89. The bonds have a coupon rate of 9% and are paying interest semiannually. What is the yield-to-maturity on these bonds if they have 8 years until they reach maturity? Select one: A. 9.49% B. 8.03% C. 9.44% D. 10.23% 2....A 20-year $1,000 par value bond pays a coupon rate of interest of 12%. If similar bonds are currently yielding 9%, what is the market value...

Rottweiler Corporation issued 100, $1,000 par value bonds on February 24, 2019. The original bonds' maturity...

Rottweiler Corporation issued 100, $1,000 par value bonds on February 24, 2019. The original bonds' maturity was 20 years, and they have a six percent coupon. Rottweiler used the money to purchase 150 Really Adorable Puppies. The firm hopes to double production of Really Adorable Puppies in the next five to ten years. The company makes all payments on a semiannual basis. 1. What is the value of the bond on February 24, 2020, if the interest rate on comparable...

Rottweiler Corporation issued 100, $1,000 par value bonds on February 24, 2019. The original bonds' maturity...

Rottweiler Corporation issued 100, $1,000 par value bonds on February 24, 2019. The original bonds' maturity was 20 years, and they have a six percent coupon. Rottweiler used the money to purchase 150 Really Adorable Puppies. The firm hopes to double production of Really Adorable Puppies in the next five to ten years. The company makes all payments on a semiannual basis. 1. What is the value of the bond on February 24, 2020, if the interest rate on comparable...

MC Qu. 120 A company issued... A company issued 5-year, 6% bonds with a par value...

MC Qu. 120 A company issued... A company issued 5-year, 6% bonds with a par value of $92,000. The company received $89,947 for the bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest period is: Multiple Choice: $5,520.00. $5,930.60. $2,554.70. $2,965.30. $2,760.00. MC Qu. 122 A company issued... A company issued 11%, 5-year bonds with a par value of $150,000. The market rate when the bonds were issued was 12%. The company received $144,481...

Corporate Financial Management:Valuation of Bonds 9. a. The XYZ Company has €1,000 par value, 9% coupon...

Corporate Financial Management:Valuation of Bonds 9. a. The XYZ Company has €1,000 par value, 9% coupon bonds outstanding. The bonds will mature in 20 years. What is the current price of the bonds if the present yield to maturity is 6%? Suppose the yield to maturity increases to 11%. What do you think will happen to the price of the bond? Explain why. Explain the difference between the real rate of return and the nominal rate of return. An investment...

X Company issued at par 4-year term bonds with a par value of $100,000, dated January...

X Company issued at par 4-year term bonds with a par value of $100,000, dated January 1, 2020, and bearing interest at an annual rate of 6 percent payable annually on December 31. At the time of issue, the market rate for such bonds is 9 percent. X amortizes the discount or premium using effective interest rate method. Required: 1- Compute the selling price of bond. 2- Record the journal entry. 3- Prepare schedual of amortization. 4- Record the adjusting...

Subjects