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Luther Industries needs to raise $25 million to fund a new office complex. The company plans...

Luther Industries needs to raise $25 million to fund a new office complex. The company plans to issue 10-year maturity bonds with a face value of $1000 and a coupon rate of 7.0% paid annually. The following table summarizes the YTM for ten-year corporate bonds of various credit ratings:

RATING
AAA AA A BBB BB
YTM(%) 6.70% 6.80% 7.00% 7.40% 8.00%

a) Luther anticipates an A rating. However, a BBB rating is possible. How much more in interest will Luther have to pay each year if its debt is rated BBB as opposed to A?

b) Assume the bonds are issued with a coupon rate of 7% paid annually and with a BB rating. What total face value must be issued in order to raise the needed funds (i.e., $25 million)?

Solutions

Expert Solution

AS NOTHING WAS MENTIONED, SIMPLE ROUNDING IS DONE

jeff jeffy answered 10 months ago
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