Kilmarnock plc. currently has in issue 10-year corporate bonds with a total face value of £10 million. Each bond has a face value of £100. The coupon payment on the bond is 5% per annum and the bond is due to mature in 2020. This means that Kilmarnock plc. has five years of interest payments left to maturity (2021, 2022, 2023, 2024 & 2025). In 2025, in addition to its final interest payment, Kilmarnock plc. will have to repay £10 million to its debt investors. Given that the next best alternative investment for its debt holders is presently 3%, calculate the present value of Kilmarnock’s debt. 

(ii) Kilmarnock plc. has 10 million perpetual preference shares in issue. Each preference share pays an annual dividend of 4p and the investors require a return of 8% on alternative investments of identical risk. Calculate the current preference share price and preference share valuation of Kilmarnock plc. 

(iii) Equity investors in Kilmarnock plc. require a 12% return on alternative investments of identical risk. The most recent dividend payment of 5p per share was paid on the 28^th of February 2020. It is estimated that dividend payments for the next five years (2021-2025) will grow at 10% per annum. Beyond 2025, it is estimated that the growth in dividend payments will be a constant 3% per annum. Using the dividend valuation model calculates the current share price of Kilmarnock plc. 

(iv) Assuming that there are 50 million shares in issue use your answer in question iii to calculate the equity valuation of Kilmarnock plc. 

(v) The value of Kilmarnock plc. is the sum of the value of equity plus the value of preference shares plus the value of debt. Use your answers in questions i, ii and iv to calculate the total value of Kilmarnock plc.

Answer rating: 100% (QA)

The present value of Kilmarnocks debt would be 10 million This is because the coupon payments on the bond are 5 per annum and the bond is due to matur... View the full answer