Consists of two issues of corporate bond

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A company has only debt and equity in its total capital. Total value of debt is $30,000. It consists of two issues of corporate bond. $20,000 of the debt has 30 years to mature and pays 8% coupon annually. The market price for the bond is currently $1200/per bond and the face value of the bond is $1000/per bond. The remaining $10,000 debt is a 20-year bond. It is sold at the par value and its coupon payment is $100 per year. The company has1000 shares outstanding and the stock price is currently $40/share. It just paid $4 dividend and it anticipates the dividend to grow at a constant rate of 5% per year. The beta for the firm is 1.5 and the risk-free rate is 4%. If the company plans to take on a project that yields 11% return, what is your recommendation assuming the tax rate is 30%.

Reference no: EM133305667

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