Reference no: EM133109133

Question - Wolverine Corporation is a struggling Michigan based company that decides to raise money by issuing 20-year bonds in the market. The funds will be used to update its product line in order to compete more effectively with the highly advanced Buckeye Corporation, headquartered in Columbus, Ohio. Each bond has a face value of $1,000 and a coupon rate of 10% (a rate consistent with its BBB bond rating). Coupons are paid semi-annually.

Question -

a. The bonds were issued at a yield (rd) of 10%. At what price were the bonds issued?

b. If Wolverine was able to sell 2,500 bonds in the market, how much money did Wolverine raise in the bond issuance?

c. Four years after issuing the bonds, Wolverine Corp ran into worse financial trouble and its credit rating deteriorated to a B rating (junk status), pushing the yields on Wolverine bonds to 13%. Compute the new price on the Wolverine bonds.

d. Suppose that 12 years after issuance, the price of Wolverine bonds increases to $1,216.58. What is the Yield-To-Maturity (YTM) on Wolverine bonds?

e. In part (a), instead of issuing 20-year bonds, Wolverine's CFO, Mr. J. Harbaugh, is considering issuing a type of perpetual bond called a Consol. A Consol is a bond that pays a constant coupon forever (i.e., never expires). If the coupon rate on the consuls is 6.5% (on a face value of $1,000) and the required yield (rd) on the bonds is 5.8%, at what price would these bonds sell? Assume coupons are paid annually.

f. Harbaugh decides that Wolverine doesn't yet have sufficient cash flow to start paying coupons on the perpetual bonds in part (e). Therefore, Harbaugh will issue a debt security he calls a "Delayed Consol" where the bonds sold today, but won't start paying the perpetual coupon for another 5 years (i.e., the first coupon will be in year 5). If Wolverine decides to issue these bonds, at what price would they be issued in the market. Again, assume the coupon rate would be 6.5% and the required yield (rd) on the bonds is 5.8%. Coupons are paid annually.