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Estimate of the required rate of return for potential bond

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Question - Permian Underground Machines & Pipes Co. is a small company in the oilfield services & equipment industry. (Its trading symbol in the Nasdaq Stock Market is PUMP.) Managers are considering a new oilfield services operation in the Permian Basin. This project would require an outlay of $50 million, and has a projected lifetime of 12 years.

-PUMP does not have any bonds outstanding yet.

-Managers at PUMP have identified three competitors with a similar debt to equity ratio to what PUMP will have after issuing its bonds. Moreover, these competitors have the same credit risk as PUMP. The competitors:

-Nabors Industries, which has a bond with 7 years to maturity and YTM of 4.000% and a bond with 13 years to maturity and a YTM of 6.000%.

-Diamond Offshore Drilling, which as a bond with 10 years to maturity and a YTM of 5.500%.

-Akers Solutions, which has a bond with 12 years to maturity and YTM of 6.350% and a bond with 15 years to maturity and TYM of 7.142%.

Given this information, what would be a reasonable estimate of the required rate of return for potential bond investors (i.e., an estimated YTM for the new bond), if the company decides to raise funds for the new project by selling bonds?

Reference no: EM132823663

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