Suppose the discount rate for the bond is given

QUESTION

Information:a. Answer all questions.b. Always explain your answers with clear statements.1. Company AFLAC had issued a 12-year coupon bond with 8% coupon rate on the face value as$1,000 and with semi-annual payments. Currently, the company has $4 million in debts. Answerthe following questions:a) Suppose the discount rate for the bond is given as 10%, what is the present value of the bond?b) Suppose the current market price of the bond is given as $906 per bond, what is the currentmarket discount rate (or so called Yield to Maturity) for the bond?c) The company also issued a common stock of $0.45 dividend with 10% growth rate for thecoming 3 years and possibly smoothed out toward 5% from the 4 th year and on. There is also onepreferred stock issued with preferred dividend as $1.2 and preferred stock price as $10 per share.The current common stock price is $14.20/ per share, the corporate income tax rate is 25%. Whatis the Weighted Average Cost of Capital (WACC) for Company AFLAC if there are 5 millionshare of common stock issued and 1 million shares of preferred stock issued?d) What are the assumptions for Weighted Average Cost of Capital (WACC)?2. You are given with the following information of two projects planned by your company. Twoprojects are of the same initial costs with $2 millions.ProjectABYear 1-220-206Table 1: (in thousands)Year 2Year 3720-1809151600Year 41000Year 51800Answer the following questions.a) Suppose the weighted average cost of capital is 10%. What are the Net Present Values for thesetwo projects? Which project is better? What are the limitations for this criterion?b) Suppose the financial manager discovered that if we postponed the project B to two years later,the cost of capital could be 8% due to possible low future interest rates. However, thedeferment may cost the firm additional $0.5 million to restart the facilities and the initial costmust be spent now, instead of two years later. Will you recommend waiting for additional 2years to start?c) Let the corporate income tax rate be 30%, the cost of debts be 6%, the cost of equity be 25%and there is no preferred stock issued by the firm. What is the debt-to-equity ratio for yourcompany if the cost of capital is given as in a)?d) Find the IRR (Internal Rate of Return) for project A and project B. Which project will youchoose? What are the limitations for this criterion?3. You are given with the following information of two projects planned by your company whenthere is no consideration of the possible bad condition of economy. Two projects are of the sameinitial costs with $1 million.ProjectAYear 1850Table 1: (in thousands)Year 2Year 32720- 250Year 41300Year 52800B1460-3751600Answer the following questions.a) Suppose the cost of capital is 10% and the $1 million initial outlays are paid out byinstallments, that is, the $1 million initial outlays are present values for the regular payments eachyear, what is the Net Present Value for each project?b) Suppose the financial manager discovered that if we postponed the project B to two years later,the cost of capital could be 9% due to possible low future interest rates. However, the defermentmay cost the firm additional $350,000 to restart the facilities and the initial outlay must be spentnow, instead of two years later. Will you recommend waiting for additional 2 years to start?c) Let the corporate income tax rate be 30%, the cost of debts be 6%, the cost of equity be 25%and there is no preferred stock issued by the firm. Assuming the weighted average cost of capitalis given as 12% in a), what is the debt-to-equity ratio for your company?d) Find the IRR (Internal Rate of Return) for project A and project B. What is your decision basedon the IRR criterion?ProjectABYear 1-650160Year 27201875Year 3-450-1000Year 4-2100Year 5-500

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