You have been engaged as a management consultant by Scylace plc, a grocery retail chain

You have been engaged as a management consultant by Scylace plc, a grocery retail chain. You have been asked to evaluate three alternative proposals financing expansion. The options are:

to issue a bond redeemable in 20 years

to issue a bond redeemable in 50 years

or to issue new shares.

The details of the proposed alternative bonds and their expected market values are as follows:

A.20-year bond

B.50-year bond

Face Value of each bond

A. £100

B.£100

Nominal Interest Rate

A. 8.0%

B. 6.5%

Predicted market price of bond

A.£150

B. £120

Scylace plc has ordinary shares with a nominal value of £1 each listed on the London Stock Exchange.

The market price of 1 Scylace ordinary shares is 570p

Over the last year, Scylace has paid a dividend of 24.00p per share.

The directors are expecting the company to pay dividends of 24.75 per share over the next year and expect dividends to grow at a constant percentage rate for the foreseeable future.

A.Select the correct formula for the predicted yield

B. Calculate the predicted yield to redemption on the 20-year bond.

C. Calculate the predicted yield to redemption on the 50-year bond

D. Select the correct formula for calculating the cost of equity capital for Scylace plc