Lighthouse Inc., a retail company in the U.S., has two outstanding debts: A floating rate...
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Lighthouse Inc., a retail company in the U.S., has two outstanding debts: • A floating rate bank loan repayable on June 30, 2028. Interest rate is reset on Jan 1 and July 1 each year at 6-month LIBOR + 2% p.a. • A 7% fixed rate bond (annual coupon) with a face value of $160 million and a remaining maturity of 8 years. Lighthouse had total interest expense of $15.4 million for the fiscal year ended Dec 31, 2021. Lighthouse's current fixed rate financing cost, for maturities of 8 to 10 years, is 2.8% over US Treasuries. (Note: 2.8% is the credit spread.) Current US Treasury rates (on an effective annual rate basis): 2.5% for 8-year, and 2.7% for 10-year. 6-month LIBOR rates (p.a.) for the past periods: Jul 1, 2020 = 1.0% Jan 1, 2021 = 1.4% Jul 1, 20211.6% Jan 1, 2022 = 1.9% The tax rate is 25%. Equity risk premium is 5%. The unlevered beta for the retail industry is 0.9. Lighthouse has 300 million shares outstanding, trading at $2.5 per share. a. Estimate the market value of debts. Lighthouse Inc., a retail company in the U.S., has two outstanding debts: • A floating rate bank loan repayable on June 30, 2028. Interest rate is reset on Jan 1 and July 1 each year at 6-month LIBOR + 2% p.a. • A 7% fixed rate bond (annual coupon) with a face value of $160 million and a remaining maturity of 8 years. Lighthouse had total interest expense of $15.4 million for the fiscal year ended Dec 31, 2021. Lighthouse's current fixed rate financing cost, for maturities of 8 to 10 years, is 2.8% over US Treasuries. (Note: 2.8% is the credit spread.) Current US Treasury rates (on an effective annual rate basis): 2.5% for 8-year, and 2.7% for 10-year. 6-month LIBOR rates (p.a.) for the past periods: Jul 1, 2020 = 1.0% Jan 1, 2021 = 1.4% Jul 1, 20211.6% Jan 1, 2022 = 1.9% The tax rate is 25%. Equity risk premium is 5%. The unlevered beta for the retail industry is 0.9. Lighthouse has 300 million shares outstanding, trading at $2.5 per share. a. Estimate the market value of debts.
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Answer rating: 100% (QA)
SOLUTION To estimate the market value of Lighthouses debts we need to calculate the present value of the future cash flows associated with each debt For the floating rate bank loan the interest rate i... View the full answer
Related Book For
Intermediate accounting
ISBN: 978-0077647094
7th edition
Authors: J. David Spiceland, James Sepe, Mark Nelson
Posted Date:
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