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A corporation has 8,000,000 shares of stock outstanding at a price of $50 per share. They just paid a dividend of $2 and the dividend is expected to grow by 7% per year forever. The stock has a beta of 1.2, the current risk free rate is 5%, and the market risk premium is 6%. The corporation also has 500,000 bonds outstanding with a price of $1,100 per bond. The bond has a coupon rate of 11% with semiannual interest payments, a face value of $1,000, and 13 years to go until maturity. However, it can be called in 6 years for a call premium of $1,050. The company plans on paying off their debt until they reach their target debt ratio of 40%. They expect their cost of debt to be 8% and their cost of equity to be 11% under this new capital structure. The tax rate is 40%

Given the new cost of debt, what should be the new price of the bond?

a) $920

b) $960

c) $1,080

d) $1,172

Basic Finance, Finance

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