Five years ago, Shaffer’s Recliners issued $10,000,000

Five years ago, Shaffer’s Recliners issued $10,000,000

Question
Five years ago, Shaffer’s Recliners issued $10,000,000 of corporate bonds with a 30-year
maturity.> https://solutionlly.com/downloads/five-years-ago-shaffers-recliners-issued-10000000
Five years ago, Shaffer’s Recliners issued $10,000,000

Question
Five years ago, Shaffer’s Recliners issued $10,000,000 of corporate bonds with a 30-year
maturity. The bonds have a coupon rate of 10.125%, pay interest semiannually, and have a par
value of $1,000 per bond. The bonds are currently trading at a price of $879.625 per bond. A
25-year Treasury bond with a 6.825% coupon rate (paid semiannually) and $1,000 par is
currently selling for $975.42.

Part 2: Case Analysis

1) Determine the yield spread between the corporate bond and the Treasury bond. If you are
considering the investment in Shaffer’s bonds (that will be held to maturity) and require an 11%
rate of return, would you purchase the bonds? Give reasons for your answer.

2) Alternatively, you could consider purchasing Shaffer’s preferred stock. Assume that the
preferred stock has a current market price of $42, a par value of $50, and a dividend amounting
to 10% of par. Would you be willing to buy the firm’s preferred stock? Why or why not? Your
required rate of return for investments of this type is 12.5%.

3) Now assume that Shaffer’s Recliners has earnings per share (EPS) of $1.89, has 750,000
common shares outstanding, and has recently paid a dividend of $0.65 per share. Additionally,
the firm has generated a net income of $1,417,500 and has common shareholders’ equity of
$6,000,000 (book value). You believe the firm is in a constant state of growth, and your required
rate of return for investments of this risk level is 18%. The firm’s common stock is currently
trading for $45 per share. Based upon this information, would you be willing to purchase shares
of common stock in the firm? Why or why not? Use both the present value of cash flows model
and the free cash flow (FCF) approach to determine your answer. The firm’s current FCF is
$109,237. Use the firm’s weight average cost of capital, which is currently at 15.83%, as the
appropriate discount rate.

4) Would your decision to purchase shares of Shaffer’s common stock change if—rather than
expecting the firm to experience a constant rate of growth—you expect the following variable
growth pattern?
a. Fast growth of 25% for years 1 through 6
b. Moderate growth of 20% for years 7 through 10
c. Stable growth of 15% for years 11 and beyond

1/2
 Five years ago, Shaffer’s Recliners issued $10,000,000

Attachments
Assignment_2905_final(1).xlsx (14.86 KB)

Preview: = xxxx - xxxxxxxxxxxxxx required yield xx Shaffer's bonds xx 11% xx xxx present
xxxxxx the Yield xx held to xxxxxxxx is xx xxxxxxxxx the xxx is higher xxxx the required xxxxx
The xxxxx xxx be xxxxxxxxx as it xxxxx lead to xxxxxx gains xxxx xxxxxxxx Shaffer's xxxxxxxxx
stockCurrent Market xxxxxxxx ValueDividend RateRequired xxxxxxxxxxxx AmountDividend
xxxxx x Dividend xxx share/Market PriceHence, xxx

GET THE ANSWER>> https://solutionlly.com/downloads/five-years-ago-shaffers-recliners-

issued-10000000

2/2
Powered by TCPDF (www.tcpdf.org)