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Teddy Bear Ltd is considering an investment opportunity with an initial investment of $1.5 million. The company expects to raise some equity as well as issue some bonds to fund this project.
Problem a. The corporate bond has a face value of $10,000 with a coupon rate of 7% for 6 years. Coupon is paid annually and similar bond in the market has a YTM of 7.5%. Calculate the expected price of Teddy Bear's bond at issuance? If the company expects to raise $500,000 by corporate bonds, how many bonds are to be issued?
Problem b. Ordinary share of the Teddy Bear has the required rate of return of 12% with a constant growth rate of 4%. Company has just paid a dividend of $0.8 this year. In the new issuance of share, Teddy Bear expects to sell the shares at $2 lower than the market price, how many shares does the company need to issue for $1,000,000?
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