Q. Simple, Inc. has one real asset, valued at $300 million, and one outstanding bond issue, having a total face value of $100 million and a coupon rate of 5%. Interest is paid annually, and the bond issue matures in six years. Simple will issue no new bonds after the issue matures. Simple stock currently trades at $20 per share and it will pay a dividend of $1.15 per share in the coming year. Simple faces a tax rate of 35%.
a. Assume the bond issue currently trades at $95 million. Compute the yield to maturity to the nearest percentage point.
b. Assume the risk free rate is 3%, the market risk premium is 7% and the beta of Simple's real asset is 1.2. Use CAPM to approximate the OCC of Simple's real assets.
c. Compute Simple's market value, return on equity and CCC.
d. Approximate Simple's share price one year from now.