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, witr 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 rati 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 governme 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 revised market valuation o Sea Cruise Co.'s debt and the increase in the company's effective cost of debt.

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.<br /><br />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, which means the yield on the company's debt will be 50 basis points higher than the yield on government bonds.<br /><br />Given that the new debt issue will mature in four years, the yield on the company's debt will be 5.2% + 0.5% = 5.7%.<br /><br />The company's bankers advise that a 90 basis point spread will be necessary to ensure full subscription by institutional investors. Therefore, the coupon rate that should be applied to the new debt issue is 5.7% + 0.9% = 6.6%.<br /><br />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 company's existing debt and the market value of the new debt issue.<br /><br />The market gearing ratio of SkyTech Ltd. is 30%, which means the market value of debt is 30% of the total market value of the firm. The current market value of SkyTech Ltd.'s equity stands at $1.5 billion, so the market value of debt is $1.5 billion * 0.3 = $450 million.<br /><br />The existing debt has an average annual coupon rate of 4% and is set to mature in three years. The prevailing yield curve indicates that three-year government bonds yield 3.6%. Therefore, the yield on the existing debt is 4% + 0.5% = 4.5%.<br /><br />The market value of the existing debt can be calculated using the present value of the coupon payments and the face value of the debt. Assuming a discount rate of 4.5%, the market value of the existing debt is approximately $1.05 billion.<br /><br />For the new debt issue, the market value of the debt can be calculated using the coupon rate of 6.6% and the prevailing yield curve. Assuming a discount rate of 5.7%, the market value of the new debt issue is approximately $1.15 billion.<br /><br />The increase in the company's effective cost of debt can be calculated by comparing the market value of the existing debt with the market value of the new debt issue. The increase in the effective cost of debt is approximately 0.9% or 90 basis points.