Mark Motel's debt has a face value of $40 million, a coupon rate of 14% (paid semiannually), and expires in 12 years (at t = 12 . The current annual yield-to-maturity (stated) for all bonds of the company is 15%. Mark wishes to conserve cash for the next few years. To do this, Mark decides to issue new equity and use the proceeds to purchase the existing debt at the market price. The current stock price of Mark is $60 and there are 2 million shares outstanding. 1. How many shares should Mark issue to purchase the existing debt? Assume the decision to purchase the bond does not change the stock price. Instead, the company decides to issue a zero-coupon bond that matures at year 5, and use the proceeds to purchase the existing debt at the market price. 2. What is the face value of the zero-coupon bond that Mark needs to issue?

Mark Motel's debt has a face value of $40 million, a coupon rate of 14% (paid semiannually), and expires in 12 years (at t = 12 . The current annual yield-to-maturity (stated) for all bonds of the company is 15%. Mark wishes to conserve cash for the next few years. To do this, Mark decides to issue new equity and use the proceeds to purchase the existing debt at the market price. The current stock price of Mark is $60 and there are 2 million shares outstanding. 1. How many shares should Mark issue to purchase the existing debt? Assume the decision to purchase the bond does not change the stock price. Instead, the company decides to issue a zero-coupon bond that matures at year 5, and use the proceeds to purchase the existing debt at the market price. 2. What is the face value of the zero-coupon bond that Mark needs to issue?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 17P

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4. Leona Motel’s debt has a face value of $40 million, a coupon rate of 14% (paid semiannually), and expires in 12 years (at t = 12). The current annual yield-to-maturity (stated) for all bonds of the company is 15%. A) Leona wishes to conserve cash for the next few years. To do this, Leona decides to issue new equity and use the proceeds to purchase the existing debt at the market price. The current stock price of Leona is $60 and there are 2 million shares outstanding. How many shares should Leona issue to purchase the existing debt? Assume the decision to purchase the bond does not change the stock price. B) Instead, the company decides to issue a zero-coupon bond that matures at t = 5, and use the proceeds to purchase the existing debt at the market price. What is the face value of the zero-coupon bond that Leona needs to issue?