Company P is a public listed company. As the company is planning to raise $1 billion of fund for its expansion in the coming 10 years. The management is facing with 2 ways for raising the fund:

Issue a 10-year bond at par value. Annual coupon rate is 12%, pay semi-annually. It has face value $1,000.

Issue common stock at the price of $300 per share. No dividends will be paid on the stock over the next five years. The company will pay a $20 per share dividend in the 6th year and will increase the dividend by 5 percent per year thereafter.

(a) If you are the potential investor, which one is more attractive to you if your required return is 9%. (20 marks)

(b) If you are the chairman of the company, which type of the above option do you prefer? Explain with 4 reasons. (10 marks) Expert Answer

Answer rating: 100% (QA)

a As a potential investor with a required return of 9 we need to calculate the present value of the cash flows from each investment option and compare ... View the full answer