DEc 2011, Close Co

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    I am having problem in part c where it says to calculate WACC and we have to find the market value of the bond.

    8% Bonds ($100 nominal) 120

    Financial analysts have forecast that the dividends of Close Co will grow in the future at a rate of 4% per year. This is slightly less than the forecast growth rate of the profit after tax (earnings) of the company, which is 5% per year.
    The finance director of Close Co thinks that, considering the risk associated with expected earnings growth, an earnings yield of 11% per year can be used for valuation purposes. Close Co has a cost of equity of 10% per year and a before-tax cost of debt of 7% per year. The 8% bonds will be redeemed at nominal value in six years’ time. Close Co pays tax at an annual rate of 30% per year and the ex-dividend share price of the company is $8·50 per share.

    I got how the prinicipal amount is calculated by finding out the present value of the future principal payment but I am not able to calculate the interest part. I know it’s a childish question..but still.. :)


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