Lowes Corporation is expecting to have EBIT next year of $10 million, with a standard deviation of $5 million. Lowes has $40 million in bonds with coupon of 8%, selling at par, which are being retired at the rate of $3 million annually. Lowes also has 200,000 shares of preferred stock, which pays annual dividend of $4 per share. The tax rate of Lowes is 35%. Calculate the probability that Lowes will not be able to pay interest, sinking fund, and preferred dividends, out of its current income, next year.
So I began by finding the valuation of the bonds. Then finding the preferred stock dividends.
I need to find the probability (z table) of the ability for Lowes to pay interest, retire the bonds (sinking fund), preferred dividends out of it's current net income (EBIT - interest - tax).
Please advise, there is bonds, quant, and corp fin all wrapped in 1 question.
