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Malta ltd plans to issue 1000 bonds that have a face value of $100 and 8 years to maturity. the bonds pay a common rate of 8%, paid evry six months and offer the same yield as that of similar risk

Malta ltd plans to issue 1000 bonds that have a face value of $100 and 8 years to maturity. the bonds pay a common rate of 8%, paid evry six months and offer the same yield as that of similar risk companies, i.e 2% higher than the government bond rate 5.5%. the potential investors are offered the option to convert each bond held into Malta's ordinary share and expected to pay a dividend of $1.50 per share in the next year. these dividends are expected to grow at 7.5% every year. Assume you are a potential investor and shares in companies with similar risks to malta Ltd are currently tradining at nominal discount rate of 10% per annum. Calculate the value of the bond and the share. Discuss whether you should accept the option to convert Malta Bonds into ordinary shares.

 

Aug 09 2021 View more View Less

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