In January 1, 2016 ABC crop approved a $300 million Project to build a new plant which will be used to manufacture its next generation cell phones.
To finance the cost of the new plant, the management issued 1000000 shares of seasoned stock at market price of $200 per share. Additionally, $100 million dollars of 3.5% coupon bonds (face value of 1000, with 10-year maturity) was also issued.
In January 1, 2017, the YTM rate for the bond is 5%. The company expects to issue its next annual dividend (DIV1) for the amount of $4. Moreover, the stock has a constant dividend growth rate of 7%. The expected return on the investment is 12%. Answer the following questions. Each question is worth 2 points.
What is the annual interest payment that the bondholders will receive?
What is the percentage of stock in company 2016 capital structure?
What is the price that investors would pay for the bond in 2017?
from your answer in #3, is the bond selling at premium, at par or at a discount?
If you bought he bond in January 1,2016 and sold the bond a year later (in 2017) for the amount in your answer from question #3, what would be your bond rate of return?
In 2017 what is the price of the stock?
Based on the stock price calculated in question#6, what is the dividend yield?
In 2017, what is the current yield for the bond?
Since (DIV1) is given above, which is = $4. What was the previous dividend amount (DIV0)?