Read the following case and answer questions:
Baneol Limited is considering to raise funds. They have three alternatives for consideration. One, they can issue bonds with Face value of Rs. 1000 at coupon rate of 8.5% paid annually for period of 5 years. Second, they can raise equity from market.
A What is the price of bond if following are the spot rates for corporate bond?
Three year 7.5% 8% 8.9% 9.5% 9.8% One year Two year Four year Five year
|
One year |
Two year |
Three year |
Four year |
Five year |
|
7.5% |
8% |
8.9% |
9.5% |
9.8% |
a) What is the YTM of bond?
b) What is the cost of equity if risk free rate of return is 6%, market return is 12% and comparable beta for company is 0.30?
c) What is the cost of equity if comparable companies have P/E ratio of 30, 35, 40, and 38?
d) Compute after tax weighted average cost of capital with Debt ratio of 40%. Choose cost of equity based on part(b). Tax rate is 30%. (2*5)
