The price of a bond is $920 with a face value of $1000 which is the face value of many bonds. Assume that the annual coupons are $100, which is a 10% coupon rate, and that there are 10 years remaining until maturity. Calculate the Yield To Maturity.
Question 2.
XYZ Ltd is an Australian company that manufactures and distributes computers throughout Asia and Australia. The board of XYZ Ltd is considering an expansion of its current activities and has employed you as a consultant. You have obtained the following financial information.
Liabilities
Trade creditors $4,200,000
Provision for long service leave 97,000
Bonds 5,400,000
Equity
P & L appropriation $380,000
Ordinary shares 1,300,000
General reserve 930,000
Other information
■ XYZ Ltd pays interest on its bonds of $386 100 at the end of each year. The bonds mature in seven years. The current market interest rate on bonds of equivalent amount and maturity is 6.5 per cent per annum.
■ 1 300 000 ordinary shares issued, last traded at $2.
■ Company tax rate is 30 per cent.
■ The cost of equity has been estimated at 13 per cent.
Based on the information provided, estimate XYZ’s WACC.
Question 3.
ABC is a manufacturer of high-tech toys targeted at the teenage market. To finance its operations, ABC uses a mix of bonds, ordinary shares and preference shares. The following information has been extracted from ABC’s most recent statement of financial position.
Liabilities $
12% bonds, $100.00 face value 12,000,000
Shareholders’ funds
14% preference shares, $10.00 face value 10,000,000
Ordinary shares, $2.00 face value 40,000,000
Retained earnings 15,000,000
Total shareholders’ funds 65,000,000
The bonds will mature in six years’ time and are currently trading at $88.65.
The bonds pay coupons annually and a coupon has just been paid.
The preference shares are currently trading at $8.75 while its ordinary shares are currently trading at $3.50.
ABC’s equity beta has been estimated as 1.8, the risk-free rate is 5 per cent and the market risk premium is 8 per cent.
ABC’s management considers that its present capital structure is appropriate for its financing requirements and has no plans to change the company’s capital structure. Assume there are no company or personal taxes payable.
Based on the information provided, estimate ABC’s WACC.
