QUESTION 2

(a) Bella Corporation issues Bond Orbit which pays a coupon rate of 9% compounded semi-annually, with a maturity period of 12 years. The face value of the bond is $1,000 with an 11% yield to maturity. 3 years later, the bonds yield dropped to 8% due to a recession in the economy. You are required to calculate the value of Bond Orbit before the

recession and during a recession. Furthermore, comment on the changes to the bonds value.

(11 marks)

(b) Lian Corporation is a public listed company. The entity intends to measure its cost of capital. The finance executive has collected the necessary data as follows:

Preferred stock features: 400,000 preferred stocks at $7 per share with a flotation cost of 7% per share. The company declared a dividend of $0.60 per share.

Common stock features: 800,000 common stocks with a market value of $5.75 per share with a flotation cost of 2% per share. Recently, the company has paid a dividend of $0.25 per share and expects its dividends to grow at 3% indefinitely.

Debt features: A bank has lent out $1,200,000 to the company. Besides, the company issues a $1,000 par value bond with an annual coupon interest rate of 6%. The bond matures in 8 years. The market price of the bond is $1,100 with a flotation cost of 4%. The companys tax rate is 21%. Calculate the Weighted Average Cost of Capital.

To calculate WACC used this weighted:

Preferred shares - 30%

Common shares - 50%

Bonds - 20%

(14 marks)

[25 Marks]