c) What is the percentage price change of the TWO bonds following the interest rate rise of 2%? 

d) What does this change tell you about the interest rate risk of lower coupon bonds?

e) Which do you think is riskier for Manchester United plc to raise future capital, an underwritten offering, or a best-efforts offering? Justify your answer. 

f) Explain why the valuation models for perpetual bonds, preference shares, and equity ordinary shares with zero growth dividend payments are virtually identical.

Transcribed Image Text:

Manchester United plc has recently completed a period of extraordinary growth, due to the popularity of its football novelties. The current dividend rate is £2. The chairman has told a meeting of equity analysts that he expects the firm's dividends to grow by 25 percent during the next year, by 15 percent per annum for the following two years, and then to continue growing at a rate of 6% thereafter. In the past Manchester United plc has issued a number of bonds to finance its sports stadium and retail complex. The details of two such bond issues are shown below. Bond M is a 4 per cent coupon bond. Bond U is a 12 per cent coupon bond. Both bonds have nine years to maturity, make semi-annual payments, and have an expected return of 8 per cent. The par value of the bonds is £1,000. Manchester United plc is considering raising capital to finance the expansion of its retail complex due to the fame of its football novelties. The Bank of England has increased interest rates by 2 per cent to combat the rising inflation rate. Required a) What price do you expect the Manchester United plc equity stock to sell for today, if the required rate of return on equity for a company of this risk level is 16 percent? b) Calculate the market value of the TWO bonds above. Manchester United plc has recently completed a period of extraordinary growth, due to the popularity of its football novelties. The current dividend rate is £2. The chairman has told a meeting of equity analysts that he expects the firm's dividends to grow by 25 percent during the next year, by 15 percent per annum for the following two years, and then to continue growing at a rate of 6% thereafter. In the past Manchester United plc has issued a number of bonds to finance its sports stadium and retail complex. The details of two such bond issues are shown below. Bond M is a 4 per cent coupon bond. Bond U is a 12 per cent coupon bond. Both bonds have nine years to maturity, make semi-annual payments, and have an expected return of 8 per cent. The par value of the bonds is £1,000. Manchester United plc is considering raising capital to finance the expansion of its retail complex due to the fame of its football novelties. The Bank of England has increased interest rates by 2 per cent to combat the rising inflation rate. Required a) What price do you expect the Manchester United plc equity stock to sell for today, if the required rate of return on equity for a company of this risk level is 16 percent? b) Calculate the market value of the TWO bonds above.

Answer rating: 100% (QA)

a What price do you expect the Manchester United pl c equity stock to sell for today if the required rate of return on equity for a company of this risk level is 16 percent ANS WER The price of Manche... View the full answer