A 20 year bond issued by Wetherby Ltd has a face value of £100 and pays an annual
coupon of 4%. At the time of issue, the yield to maturity is 6%.
a) What is the annual coupon payment from the bond?
b) What is the bond price at the time of issue?
c) Assume that the yield moves to 5% in 1 year’s time, what is the new bond price?
d) Explain why the bond trades at a discount to par value, refer to coupon in your answer.
e) Wetherby’s largest client, who accounts for 30% of net revenue, has just announced a new deal which will mean that they will double the current volume of business with Wetherby. Discuss the impact, if any, that this would have on Wetherby bond yields. Refer to risk in your answer.
a) Fossil Fuel Ltd has a target debt-equity ratio of 0.7 and an after tax cost of debt of 6%. The equity currently has a beta of 1.70, market risk premium is 7%, and 5% risk free rate. What is the WACC for the company?
b) The company is considering an investment proposal which has an upfront cost of £105m with estimated annual after-tax cash flows of £20m for 10 years. What is the NPV of the new facility and should the company go ahead with the investment?
c) The lead engineer on the project says that he is concerned about the potential cost of closing down the project and that the expected cost in 10 years time is £25m. How would this affect the investment decision? Use a calculation to justify your answer.
d) Explain why it can be incorrect to evaluate all projects at the firm’s current WACC?
a) Define Gordon Growth Model. Give two scenarios where the model will not work.
b) Compact Batteries Limited have invested in a new technology and manufacturing capability in order to benefit from increased demand for electric vehicles. They have just paid a dividend of £20 and announced that they expect profits and dividends to grow at 9% for the next two years and then return to a steady state growth rate of 4%. If investors require a 15% return what is the current share price?