Permian Underground Machines & Pipes Co. (PUMP) is in the oil and gas equipment
ID: 2620396 • Letter: P
Question
Permian Underground Machines & Pipes Co. (PUMP) is in the oil and gas equipment and services industry. It is considering a new oilfield services operation in the Permian Basin. This project would require an outlay of $50 million. Suppose that PUMP hires Moody’s to assess the company’s credit quality if it were to issue the bonds. Moody’s advises PUMP that it would rate its bonds as Baa. Managers at PUMP consider issuing a 10-year bond. Currently, the yield on a U.S. Treasury bond with about 10 years to maturity is 1.46%. Estimate the required rate of return for the bond that PUMP managers are considering. 1.93% 3.86% 8.95% 1.46% 5.40%
Explanation / Answer
required rate of return on PUMP bonds = risk free rate + inflation premium + maturity risk premium + default risk premium + liquidity risk premium
Required rate of return on PUMP bonds = 1.46 + 0+0+0+0 = 1.46%
as other rates are not given
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