Sumi Inc. has outstanding Rs.1, 000-face –value bond with a 16 percent coupon ra
ID: 2770612 • Letter: S
Question
Sumi Inc. has outstanding Rs.1, 000-face –value bond with a 16 percent coupon rate and 6 yearsremaining until final maturity. Interest payments are madequarterly. What would be the value of this bond if your nominalannual required rate of return is : (i) 13 %, (ii)19 %. ----------------- S&T Company just paid adividend of Rs.2 per share and has a share price of Rs.30. Thedividends are expected to grow @ 10% forever. S&T Company hasRs.75 million in equity and Rs.75 million in debt in its totalcapital. The tax rate for the firm is 35% and the Cost of debt is8%. What will be the Weighted Average Cost of Capital (WACC) forS&T Company ? Sumi Inc. has outstanding Rs.1, 000-face –value bond with a 16 percent coupon rate and 6 yearsremaining until final maturity. Interest payments are madequarterly. What would be the value of this bond if your nominalannual required rate of return is : (i) 13 %, (ii)19 %. ----------------- S&T Company just paid adividend of Rs.2 per share and has a share price of Rs.30. Thedividends are expected to grow @ 10% forever. S&T Company hasRs.75 million in equity and Rs.75 million in debt in its totalcapital. The tax rate for the firm is 35% and the Cost of debt is8%. What will be the Weighted Average Cost of Capital (WACC) forS&T Company ? ----------------- S&T Company just paid adividend of Rs.2 per share and has a share price of Rs.30. Thedividends are expected to grow @ 10% forever. S&T Company hasRs.75 million in equity and Rs.75 million in debt in its totalcapital. The tax rate for the firm is 35% and the Cost of debt is8%. What will be the Weighted Average Cost of Capital (WACC) forS&T Company ?Explanation / Answer
Par value of the Bond = $1,000
Couponrate = 16% (Compounded quarterly) (16% / 4 = 0.04)
Number of years = 6years (6*4 = 24)
Nominal annual required return = 13% (13% / 4 =3.25%)
Calculating the Bond Value :
Bond Value = C * Present Value of the coupons + Present value ofthe face amount
= Rs.40 * PVoA(3.25%, 24) + $1000 * PVF(3.25%, 24 )
= Rs.40 * 16.488369 + Rs.1000 * 0.4641288
= Rs.659.535 + Rs.464.1288
= Rs.1,123.66 (Premiumbond)
Nominal Annual required return = 19%
= Rs.40 * PVoA (4.75%, 24) + Rs.1000 *PVF(4.75%,24 )
= Rs.40 * 14.140547 + Rs.1000 * 0.328324
= Rs.565.62 + $328.32
=Rs.893.94 (Discount bond)
Dividend (D0) = Rs. 2 per share
Share Price(P0) = Rs. 30
Dividend growth rate (g) = 10%
Calculating Required Return(Re):
Re = [D1 / P0] + g
= [2 * (1.10) / 30] + 0.10
= (2.20 / 30) +0.10
= 0.1733 (or) 17.33%
Required Return (Re) = 17.33%
Calculation of Weighted Average Cost of Capital(WACC):
WACC = (E/V) * R e + (D/V) * R d (1-Tc )
TotalEquity = 75Million
Debt = 75Million
Total Capitalization= 150 Million
E/V = 75 Million / 150 Million = 0.5
D/V = 75 Million / 150 Million =0.5
WACC = (E/V) * R e + (D/V) * R d (1-Tc )
= 0.5 * 17.33% + 0.5 * [8% (1-35%)]
= 0.5 * 0.1733 + 0.5 * [0.08* 0.65]
= 0.08665 + (0.5 * 0.052)
= 0.08665 + 0.026
= 0.11265 (or) 11.27%
Weighted Average Cost of Capital (WACC) =11.27%
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