Issuing bonds having 14% annual coupon rate. Interest will be paid semi-annually. The bonds will have a face value of $1000 and will mature in ten years from now. Current yield at maturity is 12%. Rumors have started circulating that Moody’s will soon downgrade the credit rating of your selected company’s bonds., which will result in 3% per annum increase in the yield to maturity, from 12% to 15% per annum.

Current Value

Coupon Rate 14%

YTM 12%

Par Value 1000

= 1114.70

1)      Issuing additional ordinary shares. Assume they just paid a cash dividend of $1.20 per ordinary share. Security analysts agree with the top management in projecting steady growth of dividends over the foreseeable future. The required rate of return for shares of this type is 15%

Solution

Increase in Rate

Coupon Rate 14%

YTM 15%

Par Value 1000

PV (949.03)

20) Constant Dividend Growth Rate Model

                                                                             ₌