DLL is a publicly listed company that needs to raise $10 million for a new investment. If DLL decided to issue bonds, the bonds will have a face value of $100, a semi-annual coupon payment of $5 (annual coupon rate is 10%), a 10-year year term to maturity, and an annual required rate of return of 8.5% (nominal rate).
i. Advise if the bond is trading at a discount, premium or par. Explain.
ii. Calculate the price of the bond.
iii. If DLL decides to issue ordinary shares, it is expected to pay a constant dividend of $1.5 at the end of each year for five years (dividend of $1.5 starts in year 1), after which the dividend is expected to increase at a rate of 5% every year (i.e. the dividend is expected to be $1.575 in year 6). The required return on equity is 12%. How many ordinary shares would DLL have to issue?