Halliburton is in the oil and gas equipment and services industry. Suppose that

Question

Halliburton is in the oil and gas equipment and services industry. Suppose that Halliburton managers are considering a new oilfield servicing operation that would cost $500 million. Its book debt-to-equity ratio would increase only slightly, so its credit ratings would not change. Halliburton managers consider raising funds for the project by selling $500 million in new bonds with a maturity of 10 years. The managers judge that the proposed project would have about the same risk as Halliburton’s existing operations. Halliburton has an outstanding bond that matures in about 10 years and has a yield to maturity of 8.088%. Treasury bonds with 10 years to maturity have yields of 3.515%. Estimate the required annual rate of return on Halliburton’s new bond that the company issues to fund the new project. Do not round at intermediate steps in your calculation. Round your answer to 3 decimal places. Do not type the % symbol.

Explanation / Answer

Since the risk of the new project would be same as the existing operations, the yield would be same as that of a ten year bond

required annual rate of return on Halliburton’s new bond = 8.088%

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.