MinicaseCompany X has been doing really well in the past for 10 years. It recently decides to expand again. In order to achieve this goal, management decides to issue both bonds and stocks to the public. The bond will have a face value of $1000 and years to maturity of 30 years. The coupon rate is going to be 8%, which will be paid semiannually. As for the stock, the company decides to make its first dividend, which will be $2, 3 years from today. The dividend is going to grow rapidly at a rate of 30% for 3 years, after which it will settle down to a constant rate of 9%. If you are interested in both bonds and stocks issued by Company X, how much will you be willing to pay for each of them? Assuming the required rate of return for similar risk bond is 10%, and it
(2)Now imagine you just graduated from Tulane and obtained an interview from Company X. Before going to the interview, you want to figure out the right amount of salary to ask for because it might be one of the interview questions. You realize that you want to retire in 40 years, after which you want to be able to spend $100K every year for another 30 years. You estimated an annual cost of living of $50,000. Assume you are an extremely competitive candidate that Company X will like to have no matter what, how much salary should you be asking for in order to achieve your retirement goal? (2)
For bond:For stock:Scenario 1: Price = 4.48 + 30.53 = 35Scenario 2: Price = 6.4 + 34.51 = 40.91For the retirement problem, you start from the second withdraw annuity first.Therefore, C = 2,129.93Since the cost of living is 50,000, you need at least 50,000 + 2,129.93 = 52,129.93 as salary.
Bonus Question 6Keenan Industries has a bond outstanding with 15 years to maturity, an 8.25% coupon rate, semiannual payments, and a $1000 face value. The current yield to maturity for the bond is 7.5%, what’s the price of the bond today? If you decide to sell it one year later when YTM increases to 8%, what is your rate of return for this particular investment? (2)
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