Suppose the finance manager of ABC Company suggests either issuing bonds or shares to raise capital for the development of an environmental-friendly production technique. Assuming there is no fees or costs for the securities.

(i) Suppose ABC Company plans to issue bonds with $10,000 par value, 7 years of term to maturity, 5.5% coupon to be paid quarterly, investors require 6% of return on the bond with similar risk. Calculate the price of the bonds. Will the bond sell at par, discount or premium? Explain.

(6 marks)

(ii) If ABC Company wants to issue 20-year zero coupon bonds to raise fund for development, suppose the par value of a 20-year zero coupon bond is $20,000, what is the intrinsic value of the bonds if required rate of return is 7.45%? Would it be worth to invest if the price of bond is $4,800? Explain.

(5 marks)

(iii) ABC Company intends to raise fund by issuing shares for development and announces to pay a constant dividend of $1.5 per share. If the required rate of return is 12%, would it be worth to invest if the price of stock is $15? Explain. (4 marks)

(iv) Refer to part (i) to (iii), explain why the investor’s required rate of return on bonds and stocks are

different