Question

You are advising a company that is working to raise $100,000,000. You believe that it is best for the company to issue stocks and bonds to raise these funds. The key market conditions during the planning period are as follows: the required interest rates on bonds with a AAA rating is 3.35%; the company's stock is currently priced to deliver an 11% return. The company stock will pay an annual dividend of $1.60 per share after one year and dividends are expected to grow by 8%.

1. What is the share price in the planning period?

2. If the stock price changes to reflect a required return of 9% what is the share price assuming the dividends remain as planned (use the constant dividend growth model)?

3. The company bonds will have a par value of $1,000 If the yield to maturity for AAA-rated bonds changes from 3.35% in the planning period to 3.0% when the deal closes, what will the price per bond be when the deal closes?

4. If you plan to raise 40% of the funds from selling bonds and 60% of the funds from selling stock, how many bonds and how many shares of stock do you expect to sell in the planning period?

5. If you still plan to raise 40% of the funds from selling bonds and 60% of the funds from selling stock, how many bonds and how many shares of stock do you have to sell to raise the funds using the new prices on the day the market closes?

Answer 1