Bond Valuation

Problem 1 (Bond Valuation)Habitract Inc. has decided to issue bonds to raise capital for a large-scale project that involves the construction of 24 new wind turbines in Tehachapi, CA.(a) The bonds will have the following characteristics:Annual coupons of $50Face value of $1000Maturity of 5 yearsThe required rate of return on the part of Habitract’s bondholders is 5%.What is the value of the bonds?(b) Assume instead (in this question only) that the maturity of the bonds is 7 years rather than 5. How does this change your answer in question (a)? Can you explain what is happening, in economic terms?(c) Assume instead (in this question only) that the required rate of return on the part of the bondholders is 6%. How does this change your answer in question (a)? Can you explain what is happening, in economic terms?(d) Assume instead (in this question only) that the required rate of return on the part of the bondholders is 4%. How does this change your answer in question (a)? Can you explain what is happening, in economic terms?Problem 2 (The Dividend Discount Model)You are trying to decide whether a share of stock in Angeln Inc. is a good buy at $27.50 a share (the most recent closing price). The stock has just paid a dividend of $1.50 per share. Angeln pays dividends annually and the dividends are widely expected to grow at a constant rate of 3% forever. Angeln’s cost of equity is 8%. What is the value of the stock? Should you buy?Problem 3 (Discounted Cash Flow Valuation)Please find attached the balance sheet and income statement for DeeMoney Inc. In addition to these financial statements, you are given the following information:• The cost of equity is 15%• The cost of debt is 9% (on a pre-tax basis)• Weight of equity in the capital structure: 62.05%• Weight of debt in the capital structure: 37.95%Please answer the following questions:(a) What is DeeMoney’s NOPAT in 2012?(b) What are DeeMoney’s capital expenditures in 2012?(c) What is DeeMoney’s investment in operating working capital in 2012?(d) What is DeeMoney’s free cash flow (FCF) in 2012?(e) Assuming that this cash flow will grow at a constant rate of 5% forever, what is DeeMoney’s total enterprise value (as of Jan 1, 2013)?(f) What is DeeMoney’s firm value?(g) What is DeeMoney’s equity value per share, if there are 10 million shares outstanding??DeeMoney’s Balance Sheet (in $1,000s)Assets 2010 2011 2012Operating Current Assets 50,893.79 52,778.75 55,417.68Total Current Assets 50,893.79 52,778.75 55,417.68Net PPE 62,517.68 65,986.63 69,272.10Total Assets 113,411.47 118,765.37 124,689.79Liabilities and Shareholders’ Equity Operating Current Liabilities 18,193.4319,791.3120,781.63Total Current Liabilities 18,193.43 19,791.31 20,781.63Long Term Debt 42,805.13 44,943.93 47,191.13Total LiabilitiesCommon StockRetained Earnings 60,998.5615,707.9636,704.95 64,735.2415,699.1638,330.98 67,972.7615,699.1641,017.87Total Common Equity 52,412.91 54,030.14 56,717.03Total Liabilities and Equity 113,411.47 118,765.37 124,689.79?DeeMoney’s Income Statement (in USD ‘1,000s)2010 2011 2012Sales 125,663.68 131,946.86 138,544.21COGS 70,371.66 74,042.48 76,689.07SGA 31,415.92 33,054.68 34,236.19Depreciation 6,283.18 6,610.94 6,847.24Operating Profit 17,592.92 18,238.76 20,771.70Interest Expense 3,669.03 3,852.46 4,044.95Earnings Before Taxes 13,923.88 14,386.30 16,726.75Taxes 5,569.55 5,754.52 6,690.70Net Income 8,354.33 8,631.78 10,036.05Dividends 6,660.18 7,005.75 7,349.06