Question

Dani Corporation has 8 million shares of common stock outstanding. The current share price is $82, and the book value per share is $6. The company also has two bond issues outstanding. The first bond issue has a face value of $135 million, a coupon rate of 7 percent, and sells for 93 percent of par. The second issue has a face value of $120 million, a coupon rate of 6 percent, and sells for 102 percent of par. The first issue matures in 25 years, the second in 9 years. Suppose the most recent dividend was $4.90 and the dividend growth rate is 5.4 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. The tax rate is 23 percent. What is the company's WACC?

Answer 1

The present value of a $3,000 face value two-year bond with 8% coupon rate when discounted at the same rate (8%) is $3,000, demonstrating that the bond's market price equals its face value when the discount rate matches the coupon rate.

Step-by-step explanation:

To calculate the present value of a simple two-year bond with a face value of $3,000 and an 8% interest rate, we need to discount its future cash flows to the present using the appropriate discount rate. When the discount rate is 8%, the present value of the bond can be calculated by adding the present value of the interest payments and the principal amount. For the first year interest payment of $240, the present value is $240 / (1 + 0.08) = $222.22. For the second year, we have both an interest payment and the principal amount, so the present value is ($240 + $3,000) / (1 + 0.08)^2 = $2,777.78. Summing these up gives us a present value of $2,777.78 + $222.22 = $3,000, which is equal to the bond's face value, as expected with the discount rate equaling the coupon rate.