Business Finance Homework Help

Problem #1- Yield to Maturity and Yield to Call

Smith International issues bonds have a current market price of $1,200. The bonds have an 11% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may be called in 5 years at 109% of face value (call price = $1,090).

1.What is the yield to maturity?

2.What is the yield to call if they are called in 5 years?

3.Define the yield curve. If the yield curve is horizontal and interest rates remain at their current level, when is the latest that investors might expect the firm to call the bonds?

Problem #2 (Corporate value model): Assume that today is December 31, 2019, and the following information applies to an airline company. Use the free cash flow approach and determine the company’s stock price.

1.After tax operating income (EBIT(1-T)), also called NOPAT) for 2020 is expected to be $500 million

2.Depreciation expense for 2020 is expected to be $100 million

3.The capital expenditures for 220 are expected to be $200 million

4.No change is expected in net operating working capital (NOWC)

5.The free cash flow is expected to grow at a constant rate of 6% per year

6.The required return on equity is 14%

7.WACC is 10%

8.Market value of the company’s debt is $3 billion

9.200 million shares of stock are outstanding.

Questions:

1.What is the total market value (value of operations) for this airline company?

2.What is the “per share” value of this airline company?

3.Suppose that the market value of debt in 2020 was actually $10 billion and not $3 billion due to the pandemic. What happened to the value of operations and per share value?

Hint: To complete this problem, you need to calculate Free Cash Flow. Here is the equation:

FCF = EBIT(1 – T) + Depreciation – – D