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(Solved) DLL is a publicly listed company that needs to raise $10 million for a new investment.


DLL is a publicly listed company that needs to raise $10 million for a new investment. If DLL decided to issue bonds, the bonds will have a face value of $100, a semi-annual coupon payment of $5 (annual coupon rate is 10%), a five year term to maturity, and an annual required rate of return of 8% (nominal rate). 


       i.           (3 marks)

Advise if the bond is trading at a discount, premium or par. Explain.



     ii.           (9 marks)

Calculate the price of the bond.



   iii.           (13 marks)

If DLL decides to issue ordinary shares, it is expected to pay a constant dividend of $1 at the end of each year for five years (dividend of $1 starts in year 1), after which the dividend is expected to increase at a rate of 10% every year (i.e. the dividend is expected to be $1.10 in year 6). The required return on equity is 12%. How many ordinary shares would DLL have to issue?



 


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