What is the projected stock price for the coming year

Assignment Help Finance Basics

Reference no: EM133430081

Case: Vitality Vancouver Inc. (VVI) has recently raised debt capital through long-term financing. The bond indenture includes issuing 8% coupon bonds on the market that are selling at $989, paying interest semi-annually, and maturity in fifteen years. The company would like to issue an additional $1 million in new fifteen-year bonds. VVI has another bond issue outstanding that pays a 7.5% coupon and matures in 14 years. The bond has a par value of $1,000 and a market price of $942.90. Interest is paid semiannually.

The company evaluates the potential of issuing a third bond that pays an annual coupon of $35, has a face value of $1,000, matures in seven years, and has a yield to maturity of 8%. As a result of the recent financing, the CFO of the company is concerned about protective covenants that could hamper the future risk-taking ability of the firm. In particular, the bondholders reserve the right to force the repayment of the bonds prior to maturity. VVI is also experiencing rapid growth. Dividends are expected to grow at 20% per year during the next three years, 10% over the following year, and then 4% per year indefinitely. The required return on this stock is 10%.

The company is also considering the prospect to issue some preferred stock to alter the capital structure of the firm. It is however unsure about the main characteristics of the preferred stock which could cause some dilution to the existing capital structure due to similarity with another instrument. The CFO is also preparing for a meeting with the Board of Directors next week. While giving the final touches to the quarterly results, he realizes the board is likely to focus on the potential of dividend distribution to various classes of shareholders. The CFO has additionally prepared some notes regarding the voting structure of those classes of stocks. The company plans to improve its profitability and stock price-related ratios because of the recent changes in the capital structure.

Question 1: What coupon rate should be applied to the new bonds if VVI wants to sell them at par? (Use values in the dollar)

Question 2: What is the yield to maturity on a 14-year bond?

Question 3: What should be the price of the third bond being considered for an issue?

Question 4: What is the projected stock price for the coming year, if VVI just paid a $2 dividend?

Assuming VVI's stock is currently selling for $51, the expected dividend one year from now is $1.50 and the required return is 10, what is the firm's dividend growth rate?

Question 5: How would issuing the preferred stock affect the capital structure of the firm in comparison to the common stock?

Question 6: Why are the dividend distribution and voting structure a matter of interest to Vitality's board?

Question 7: What recommendations would you make in improving the financial prospect of the company, especially with respect to the relevant ratios?

Reference no: EM133430081

Questions Cloud

What is meant that gender is socially constructed : What is meant that gender is socially constructed? Do you think gendered norms are good for the future of society, why or why not?

What is fintech and how does it affect the traditional : Discuss the Chases financial performance and What is fintech and how does it affect the traditional banking activities

What skills have you developed and strengthen : What are your final thoughts on (IT215) Advanced Spreadsheet Applications? What was good about this course? What specifically did and/or did not work for you

What would the price have to be at the end of year : He would have to make an additional $7,260 in interest payments on his loan during that time, and then sell. What would the price have to be at the end of year

What is the projected stock price for the coming year : What is the projected stock price for the coming year, if VVI just paid a $2 dividend and How would issuing the preferred stock affect the capital structure

What can the administrator use for this task : A network administrator needs to run a script in Linux on a set schedule. Editing a file would schedule the script to run in this fashion.

Children and families to promote sustainability : What is 1 thing you can do or you do with children and families to promote sustainability?

Patient protection and affordable care act : What changes have you seen with Patient Protection and Affordable Care Act (PPACA) "ObamaCare" since your text was written?

What happens when you select end task in task manager : What happens when you select End Task in Task Manager? What is the difference between End Task and End Process? Why does Task Manager have multiple tabs

User Account

All Pages