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Euler Ltd has 1 million number of coupon-paying bonds on issue. These 8% bonds have 5 years remaining to maturity, paying annual coupons with a par value of $100. Its corporate tax rate is 25%. Unfortunately, Euler is experiencing financial distress. The creditors have agreed to a postponement of the next 2 interest payments (otherwise, the next interest payment would have been due in 1 year). The postponed interest payments will accrue interest at an annual rate of 6 percent, and they will then be paid as a lump sum at maturity 5 years hence. The remaining interest payments, for Years 3 through 5, will be made as scheduled. The required rate of return on these bonds, considering their substantial risk, is now 15% p.a. Besides the debt restructure news, Euler also announced that the company would pay no dividends for the next 5 years. Euler has 100 million number of ordinary shares outstanding. Prior to this announcement, its stock was trading at $2.50 per share. With the announcement, the company is expected to restart paying annual dividends of $0.2 per share 6 years from today and grow at 5% p.a. indefinitely. After the announcement, the expected market risk premium is 9%; the risk-free rate is 3%, and Eulers stock beta is 1.5. Assume the expected return on shares hasnt changed.

a) What is the present value of each bond after the debt restructure announcement?

b) What is the present value of each share after the announcement regarding dividend cut?

c) Explain what the WACC measures; (1 mark) and calculate the WACC for Euler after the announcements?

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