SHOW ALL WORK Page 442 4. The cost of debt Cordona corp has bonds outstanding th
ID: 2802039 • Letter: S
Question
SHOW ALL WORK
Page 442
4. The cost of debt
Cordona corp has bonds outstanding that will mature twelve years from now. These bonds are currently quoted at 110 percent above par value. the issue makes annual payments of $80 on $1,000 bond face value. what is cordonas cost of debt?
5. The cost of equity
The divident of ONGO Inc is currently $2 per share and is supposed to grow at 5 percent a year forever. its share price of $50. its beta is 1.08. the market risk premium is 5 percent and the risk free rate is 4 percent. what is yourbest estimate of ongos cost of equity?
Explanation / Answer
4) Let cost of Debt be x
Value of Bond = cdf(x%,12) x coupon + df(x%,12) x Maturity Value
1100 = cdf(x%,12) x 80 + df(x%,12) x 1000
Since value of bond is more than Par Value, cost of Debt should be less than coupon rate of 8% p.a.
Using Trial and error, we get x as 6.75%
5) Using CAPM, Cost of equity = RF + Beta x Market risk premium = 4% + 1.08 x 5% = 9.40% p.a.
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