Probability of company defaulting

Reference no: EM13202329

Finance is Fun Ltd has the following structure: $10,000,000 four year bonds with a coupon of 8.5% trading at 94% and 3 million shares trading at $3.90. The market rate of return 13% and the risk free rate of return is 5%. Finance is Fun has a beta of 1.25 and pays tax at 35%. Calculate the WACC of Finance is Fun.

Your company "Digitup Ltd" needs a new earth moving machine which it can buy for USD 80,000 or lease for 5 years, with lease payments due at the start of each year.

If the leasing company can get a superior discount and buy the machine for USD 70,000 and depreciate it over 5 years to zero terminal value with maintenance and administration costs of $13,500 p.a. with zero inflation, cost of capital at 6% and taxation at 28% what is the break even lease that the company will charge?

Is this lease attractive to Digitup if its cost of capital is 8%?

Your company has a bond in issue with one year to run and a coupon of 9% which is your normal cost of capital. You notice that it has been trading at 55% lately and you are told that there is a market rumour that you will only pay back 40% of the debt. What is the implicit market estimate of the probability of your company defaulting?

Reference no: EM13202329

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