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Unformatted text preview: .4. The annualized yield on the 3­month Treasury Bills is 4%, while the average return on the value­weighted market index during the last 50 years is 15%. 5 The Financing of Delphi’s Acquisition Chrysler can raise a total of $60,000 in debt: $40,000 (before flotation costs) with a 15­year bond at 14%. Flotation costs for this bond would be 2% of the amount raised, and can be amortized straight­line over the life of the bond (GM still has to pay interest on the full amount raised). $20,000 with a 10­year government­sponsored bond at 8%, which will have the same risk as the 10­year Treasury Bonds that yield 10% per year. The government would absorb the flotation costs, so that $20,000 are disbursed to Chrysler. Both bonds have annual interest payments and principal is due in the last year. 6 Effect of Financing on Chrysler’s Risk The debt issue will increase Chrysler’s financial leverage. Moody’s is expected to downgrade Chrysler’s debt from Aa1 to A1 to reflect a slight increase in the firm’s default risk. A...
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This document was uploaded on 03/09/2014 for the course COMM 371 at The University of British Columbia.

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