YGV Co is a listed company selling computer software. Its profi t before interest and tax has fallen from $5 million to $1 million in the last year and its current fi nancial position is as follows: YGV Co has been advised by its bank that the current overdraft limit of $4?5 million will be reduced to $500,000 in two months’ time. The fi nance director of YGV Co has been unable to fi nd another bank willing to offer alternative overdraft facilities and is planning to issue bonds on the stock market in order to fi nance the reduction of the overdraft. The bonds would be issued at their par value of $100 per bond and would pay interest of 9% per year, payable at the end of each year. The bonds would be redeemable at a 10% premium to their par value after 10 years. The fi nance director hopes to raise $4 million from the bond issue. The ordinary shares of YGV Co have a par value of $1?00 per share and a current market value of $4?10 per share. The cost of equity of YGV Co is 12% per year and the current interest rate on the overdraft is 5% per year. Taxation is at an annual rate of 30%. Other fi nancial information: Average gearing of sector (debt/equity, market value basis): 10% Average interest coverage ratio of sector: 8 times Required: (a) Calculate the after–tax cost of debt of the 9% bonds. (4 marks) (b) Calculate and comment on the effect of the bond issue on the weighted average cost of capital of YGV Co, clearly stating any assumptions that you make. (5 marks) (c) Calculate the effect of using the bond issue to fi nance the reduction in the overdraft on: (i) the interest coverage ratio; (ii) gearing. (4 marks) (d) Evaluate the proposal to use the bond issue to fi nance the reduction in the overdraft and discuss alternative sources of fi nance that could be considered by YGV Co, given its current fi nancial position. (12 marks)