Problem
Martin Pillay has owned a successful trucking business for the last 5 years. He is keen to expand his operations to a neighbouring country. In order to do so, he would need to raise funds via issuing bonds and equity.
Bonds
A total of 150, 7.5% coupon bonds will be issued at a face value of R1 000. The bonds will make quarterly payments and will mature in ten years' time. Bond holders will redeem their money at a 15% premium at maturity.
Equity
A total of 1 000 equity shares will be issued with the first annual dividend of R1.50 per share being paid next year. This annual dividend is set to increase by R0.50 per year thereafter until it reaches R3.00, after which it will then grow by 1% until infinity
Task
i. Calculate the yield to maturity for these bonds. Explain step by step procedures and calculations.
ii. Calculate the total current value of the equity assuming the shareholders require an 11% per annum return. Explain step by step procedures and calculations.