Bondholders demand the same expected return as bank

Assignment Help Financial Management
Reference no: EM131905917

A corporation is considering whether to borrow money from a bank or in the bond market. The bank offered an interest rate of 5% to the firm. The bank debt will be collateralized and subject to covenants, and thus, the bank expects a recovery rate of 80% on the debt if the company defaults. The bank demands an expected return of 4.25% on bank debt. If the company issues bonds, the recovery rate on bonds upon default is expected to be 40%. The probability of default is the same for both bank and bond debt. Using these data, estimate the interest rate that the company will pay on its bonds. Assume that bondholders demand the same expected return as the bank.

Reference no: EM131905917

Questions Cloud

Determine the way in which individuals communicate : Analyze and describe the concepts of culture and its impact on communication in a global enterprise.
Variety of racial and ethnic backgrounds : An American health insurance company hired employees from a variety of racial and ethnic backgrounds.
Project for Software Analysis and Design : Project for Software Analysis and Design. The presentation & paper must include: The assumptions used in defining the project
Analyze the value of the marketing approach suggested : Compare Sinek's approach to inspire employees and connect with customers to other approaches you are familiar with.
Bondholders demand the same expected return as bank : estimate the interest rate that the company will pay on its bonds. Assume that bondholders demand the same expected return as the bank.
Number of shares outstanding and increase stock prices : Stock repurchases reduce number of shares outstanding and increase stock prices, since stock price is equity value divided by number of shares outstanding.
What is the return on assets in railway business : What is the return on assets in the railway business?
Describe the dark side of marketing : Examine whether marketing creates or satisfies consumer needs. Describe the "dark side" of marketing.
Evaluating cost of capital : Bad Boys, Inc. is evaluating its cost of capital. what is Bad Boys cost of capital?

Reviews

Write a Review

Financial Management Questions & Answers

  The bonds make semi-annual payments and currently sell

The bonds make semi-annual payments and currently sell for 105.09% of par. What is the current yield?

  Find the cash flow from mark-to-market proceeds on contract

The multiplier for a futures contract on the stock-market index is $250. The maturity of the contract is one year, the current level of the index is 700, and the risk-free interest rate is 0.5% per month. The dividend yield on the index is 0.2% per m..

  Ipo underpricing-what profit do you actually expert

IPO underpricing-What profit do you actually expert? What principle have you illustrated?

  Positions are bullish on the market

Which of the following positions are bullish on the market? I. buying a stock II. writing a put III. buying a call IV. selling a call

  What is the firm day sales outstanding

What is the company's receivable turnover rate? what is the firm's day sales outstanding (DSO)?

  Spot rate curve from the par yield curve using bootstrapping

Assume the following par yields for the on-the-run Treasury yield curve. Calculate the spot rate curve from the par yield curve using bootstrapping.

  What was its charge for depreciation and amortization

Pearson Brothers recently reported an EBITDA of $13.5 million and net income of $3.9 million. It had $2.0 million of interest expense, and its corporate tax rate was 35%. What was its charge for depreciation and amortization?

  Assuming they do not save any additional funds

What annual interest rate must they earn to reach their goal, assuming they don't save any additional funds?

  Implicit costs in measuring a firms profitability

Some major companies live and die by EVA. For example, at General Electric, more capital is allotted only to divisions that pass the EVA threshold, and divisions that regularly flunk are sold off. It’s a simple, but powerful, approach that looks at a..

  Maintain constant growt rate-how much will you pay for stock

Alexander Corp. will pay a dividend of $3.10 next year. The company has stated that it will maintain a constant growth rate of 4.75 percent a year forever. If you want a return of 16 percent, how much will you pay for the stock?

  Project has an initial requirement

A project has an initial requirement of $198,955 for new equipment and $10,880 for net working capital. What is the project's NPV if the tax rate is 37%?

  What is the coupon rate of these bonds-expressed annually

what is the coupon rate of these bonds, expressed annually?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd