1. You have been given the following facts and assumptions concerning ABC Corp. at December 31, 2013. Yield to maturity on long term government bond is 5.00%. Yield to maturity on company long term government bond is 7.0%.Coupon rate on company long term bond is 7.0%.Market price of risk is 8.0% along with estimated company beta value of 1.5.Stock is selling for $40 in the market and 250 million shares are outstanding. Assuming that book value of equity is $5240 million along with book value of interest bearing debt of $1250 million. Existing tax rate stands at 35%. Given all the information estimate the appropriate weight of debt to be used when calculating ABC Corp's weighted average cost of capital.
11.5%
19.3%
80.7%
11.11%
2. Bond 1/ Bond 2/ Bond 3 Price- $900.00 / $1,100.00 / $1,000.00 Face Value- $1,000.00/ $1,000.00 / $1,000.00 Coupon Rate- 7.00% / 10.00% /9.00% Frequency- 1/ 2/ 4 Maturity (Years)- 15/ 20/ 30 Required Return- 9.00% / 8.00% / 9.00%
• Determine the highest price you would be willing to pay for each of these bonds.
• Also find whether the each bond is undervalued, overvalued, or fairly valued
• Do you buy/sell/hold this bond?