Blue Horizon Ltd has generated significant profits and its credit rating has improved, Singapore

Assignment Details:

3 years ago, Blue Horizon Ltd (a company listed on Singapore Exchange operating in the logistics industry), issued 50,000 (with a face value of $1,000 each) 6% coupon (payable semi-annually) 10-year bonds at a discount of 20%. Since then, Blue Horizon Ltd has generated significant profits and its credit rating has improved from B to Baa recently. As a result, its current borrowing costs have been reduced by 50 basis points. Given the explosion of e-commerce and its recent success, the board has decided to expand its business operation into regional markets like Malaysia and Vietnam. In order to do so, they plan to issue more bonds. You have been approached by the board to advise them on how best to structure the impending bond issue such that interest cost is minimised. The earnings per share (EPS) in the most recent financial year i.e. FY 2018 was $15.50. In FY 2014, it was $12. During the most recent earnings conference call, management shared that EPS is expected to grow at 3% per year, forever. Blue Horizon Ltd adopts a 60% dividend pay-out policy and currently trades at $280.

(a) Calculate the dollar amount of coupon payable on the bond every 6 months and the yield-to-maturity of the bonds 3 years ago when it was issued by Blue Horizon Ltd. (5 marks)

(b) Calculate the yield-to-maturity and the price of each bond today. (5 marks)

(c) Recommend and justify three (3) things the board can do to reduce the coupon rate of the impending bond issuance. (6 marks)

(d) Calculate Blue Horizon Ltd’s cost of equity assuming the market applies the dividend growth model. (8 marks)

(e) Suppose the yield to maturity of the bond obtained in part (b) turned out to be higher than the cost of equity computed in part (d). Interpret and discuss this finding. (6 marks)