Question 1 . SkyTech Ltd., operating in the aerospace technology sector, is considering raising 200 million in the bond market to finance the acquisition of a satellite manufacturing facility. The debt will mature in four years, with interest payments made annually. The current market value of SkyTech Ltd.'s equity stands at 1.5 billion, and the company maintains a market gearing ratio of 30% (market value of debt to total market value of the firm). SkyTech Ltd.'s existing debt has an average annual coupon rate of 4% and is set to mature in three years . The company's effective tax rate is 30% The prevailing yield curve indicates that three-year government bonds yield 3.6% , while four-year bonds yield 5.2% . The estimated credit risk spread is 50 basis points. If the bond issuance proceeds, the company's bankers advise that a 90 basis point spread will be necessary to ensure full subscription by institutional investors at a nominal value of 100 1) Advise on the coupon rate that should be applied to the new debt issue to ensure that it is fully subscribed. 2) Estimate the current and I revised market valuation of Sea Cruise Co.'s debt and the increase in the company's effective cost of debt. Your answers should contain clear calculations in MS Excel and assumptions made. Usage of ChatGP I and other Al tools

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Question 1 . SkyTech Ltd., operating in the aerospace technology sector, is considering raising 200 million in the bond market to finance the acquisition of a satellite manufacturing facility. The debt will mature in four years, with interest payments made annually. The current market value of SkyTech Ltd.'s equity stands at 1.5 billion, and the company maintains a market gearing ratio of 30% (market value of debt to total market value of the firm). SkyTech Ltd.'s existing debt has an average annual coupon rate of 4% and is set to mature in three years . The company's effective tax rate is 30% The prevailing yield curve indicates that three-year government bonds yield 3.6% , while four-year bonds yield 5.2% . The estimated credit risk spread is 50 basis points. If the bond issuance proceeds, the company's bankers advise that a 90 basis point spread will be necessary to ensure full subscription by institutional investors at a nominal value of 100 1) Advise on the coupon rate that should be applied to the new debt issue to ensure that it is fully subscribed. 2) Estimate the current and I revised market valuation of Sea Cruise Co.'s debt and the increase in the company's effective cost of debt. Your answers should contain clear calculations in MS Excel and assumptions made. Usage of ChatGP I and other Al tools

Answer 1

1) To determine the coupon rate that should be applied to the new debt issue to ensure full subscription, we need to consider the prevailing yield curve, the estimated credit risk spread, and the advice given by the company's bankers.Given information:- Three-year government bonds yield: 3.6%- Four-year bonds yield: 5.2%- Estimated credit risk spread: 50 basis points (0.5%)- Bankers' advice: 90 basis points (0.9%) spread for full subscriptionThe prevailing yield curve indicates that four-year bonds yield 5.2%. Since the new debt issue will mature in four years, we will use this yield as the base rate.Next, we add the estimated credit risk spread and the bankers' advised spread to the base rate to determine the required yield for the new debt issue:Required yield = Base rate + Credit risk spread + Bankers' advised spreadRequired yield = 5.2% + 0.5% + 0.9% = 6.6%Therefore, the coupon rate that should be applied to the new debt issue to ensure full subscription is 6.6%.2) To estimate the current and revised market valuation of SkyTech Ltd.'s debt and the increase in the company's effective cost of debt, we need to calculate the market value of the existing debt and the new debt issue.Given information:- Market gearing ratio: 30% (Market value of debt / Total market value of the firm)- Existing debt's average annual coupon rate: 4%- Effective tax rate: 30%First, let's calculate the market value of the existing debt:Market value of debt = (Market gearing ratio / (1 - Market gearing ratio)) \* Market value of equityMarket value of debt = (0.3 / (1 - 0.3)) \*

2.1 billionNext, let's calculate the market value of the new debt issue:Market value of new debt issue = Nominal value \* (1 + Bankers' advised spread)Market value of new debt issue =

100.9 millionNow, let's calculate the current cost of debt:Current cost of debt = (Annual coupon rate \* (1 - Tax rate)) / (1 + Current cost of debt)

6.6\% \* (1 - 0.3) / (1 + Revised cost of debt)Solving for the revised cost of debt,Revised cost of debt ≈ 5.85%The increase in the company's effective cost of debt can be calculated as:Increase in effective cost of debt = Revised cost of debt - Current cost of debtIncrease in effective cost of debt ≈ 5.85% - 2.57% = 3.28%In summary:1) The coupon rate that should be applied to the new debt issue to ensure full subscription is 6.6%.2) The current market valuation of SkyTech Ltd.'s debt is approximately

2.2 billion. The increase in the company's effective cost of debt is approximately 3.28%.

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