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What is the fair value of the three-year maturity bond

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Reference no: EM132873117

Question - Little Lemon Co. is identifying the value of its equity using the enterprise value approach as they have never issued dividends to-date because the Company is still at its early stages. With this, they have the following available information:

-The government's real free rate for its debt securities is estimated at 3.5% with an estimated inflation premium of 1.5%.

-The target capital structure of Little Lemon is at 60% debt and 40% equity

-Little Lemon was able to determine that its cost of debt is estimated as:

-With 3 years maturity - 6.50%

-With 4 years maturity - 7.0%

-With 5 years maturity - 8.0%

-The following are the information about the current debts issued by Little Lemon

-A 3-year maturity instrument carries a Php500,000 face value and 8.0% coupon

-A 5-year maturity instrument carries a Php500,000 face value and 8.0% coupon

-Considering the current crisis, equity investors generally demand a 3.5% premium over government securities

-Little Lemon's estimated beta is at 1.2

Required - What is the fair value of the three-year maturity bond?

Reference no: EM132873117

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