Reference no: EM133034054
Millennium Chemist Ltd. issued a bond that has 14% coupon rate, paid semi-annually. The bond has a face value of $1,000 and will mature 10 years from now.
The company has just paid a dividend of $6.50 per its ordinary share. The company is forecasted to maintain a steady growth of 10% in dividends over the foreseeable future.
The company's management is considering the two following projects with the same initial investment:
Year Project 1 Project 2
0 -$78,500 -$78,500
1 $43,000 $21,000
2 $29,000 $28,000
3 $23,000 $34,000
4 $21,000 $41,000
Required:
a) Compute the value of Millennium Chemist's bond if the required rate of return in bond market is 12%.
b) How much would investors pay for the company's ordinary shares if the required rate of return for shares of this type is 15%?
c) Which project should the company choose, using NPV method if the required rate of return is 11%?
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