29 Jun Question 2. Illinois Indus
Question
2. Illinois Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 10 percent, payable annually. The one-year interest rate is 10 percent. Next year, there is a 30 percent probability that interest rates will increase to 12 percent, and there is a 70 percent probability that they will fall to 6 percent.
Required:
(a)
What will the market value of these bonds be if they are noncallable?(Do not include the dollar sign ($).Round your answer to 2 decimal places. (e.g., 32.16))
Market value
$
(b)
If the company decides instead to make the bonds callable in one year, what coupon will be demanded by the bondholders for the bonds to sell at par? Assume that the bonds will be called if interest rates rise and that the call premium is equal to the annual coupon.(Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))
Coupon rate
%
(c)
What will be the value of the call provision to the company?(Do not include the dollar sign ($).Round your answer to 2 decimal places. (e.g., 32.16))
Value
$
3.
Money, Inc., has no debt outstanding and a total market value of $165,600. Earnings before interest and taxes, EBIT, are projected to be $23,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 33 percent higher. If there is a recession, then EBIT will be 57 percent lower. Money is considering a $64,800 debt issue with a 7 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 4,600 shares outstanding. Assume Money has a tax rate of 40 percent.
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