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 6 months ago

Next > < Previous

Related Solutions

Gravity, Inc., needs to raise $46.5 million to fund its expansion plans. The company will sell...

Gravity, Inc., needs to raise $46.5 million to fund its expansion plans. The company will sell shares at a price of $27.70 in a general cash offer and the company's underwriters will charge a spread of 7 percent. How many shares need to be sold?

Mahomes Company needs to raise $275 million to start a new project and will raise the...

Mahomes Company needs to raise $275 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 55 percent common stock, 10 percent preferred stock, and 35 percent debt. Flotation costs for issuing new common stock are 6 percent, for new preferred stock, 4 percent, and for new debt, 2 percent. What is the true initial cost...

Cully Company needs to raise $23 million to start a new project and will raise the...

Cully Company needs to raise $23 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 55 percent common stock, 10 percent preferred stock, and 35 percent debt. Flotation costs for issuing new common stock are 8 percent, for new preferred stock, 6 percent, and for new debt, 4 percent. What is the true initial cost...

Cully Company needs to raise $45 million to start a new project and will raise the...

Cully Company needs to raise $45 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Flotation costs for issuing new common stock are 7 percent, for new preferred stock, 4 percent, and for new debt, 2 percent. What is the true initial cost...

Southern Alliance Company needs to raise $70 million to start a new project and will raise...

Southern Alliance Company needs to raise $70 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 70 percent common stock, 15 percent preferred stock, and 15 percent debt. Flotation costs for issuing new common stock are 10 percent, for new preferred stock, 7 percent, and for new debt, 2 percent. What is the true initial...

The Severn Company plans to raise a net amount of $270 million to finance new equipment...

The Severn Company plans to raise a net amount of $270 million to finance new equipment in early 2017. Two alternatives are being considered: Common stock may be sold to net $60 per share, or bonds yielding 10% may be issued. The balance sheet and income statement of the Severn Company prior to financing are as follows: The Severn Company: Balance Sheet as of December 31, 2016 (Millions of Dollars) Current assets $ 900.00 Notes payable $ 255.00 Net fixed...

The Severn Company plans to raise a net amount of $270 million to finance new equipment...

Southern Alliance Company needs to raise $27 million to start a new project. The company has...

Southern Alliance Company needs to raise $27 million to start a new project. The company has a target capital structure of 60 percent common stock, 11 percent preferred stock, and 29 percent debt. Flotation costs for issuing new common stock are 11 percent, for new preferred stock, 8 percent, and for new debt, 4 percent. What is the true initial cost figure Southern should use when evaluating its project?

The Landers Corporation needs to raise $1.00 million of debt on a 25-year issue. If it...

The Landers Corporation needs to raise $1.00 million of debt on a 25-year issue. If it places the bonds privately, the interest rate will be 11 percent. Thirty thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 10 percent, and the underwriting spread will be 4 percent. There will be $100,000 in out-of-pocket costs. Assume interest on the debt is paid semiannually, and the debt will be outstanding for the full 25-year...

Suppose your company needs to raise $54 million and you want to issue 25-year bonds for...

Suppose your company needs to raise $54 million and you want to issue 25-year bonds for this purpose. Assume the required return on your bond issue will be 4.8 percent, and you’re evaluating two issue alternatives: A semiannual coupon bond with a coupon rate of 4.8 percent and a zero coupon bond. Your company’s tax rate is 25 percent. Both bonds will have a par value of $1,000. b-2. What if you issue the zeroes? (Do not round intermediate calculations...

Subjects