Black Gold Ltd. currently has the following capital structure:
Debt funding: A non-callable bond that pays annually 10.5% coupon rate with an annual before-tax yield to maturity of 9.7%. The bond issue has face value of $1,000 and will mature in 16 years.
Ordinary equity funding: An ordinary share that just paid a $6.50 dividend per share in the current financial year. The firm is maintaining 4.5% annual growth rate in dividend, which is expected to continue indefinitely.
Hybrid – funding: A preferred share with face value of $100, paying fixed dividend rate of 15%.
Required:
- Calculate the current price of the corporate bond?
- Calculate the current price of the ordinary share if the average return of the shares in the same industry is 11.5%?
- Calculate the current value of the preferred share if the average return of the preferred shares in the same industry is 12.5%?
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