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TRINITY UNIVERSITY OF ASIA COLLEGE OF BUSINESS ADMINISTRATION FIN-(Answered)

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Hi! Can you please help me answer my homework? The attached files here are the questions to be answered..?


TRINITY UNIVERSITY OF ASIA

 

COLLEGE OF BUSINESS ADMINISTRATION

 

FIN 136 ? Capital Markets

 

PROBLEM SET 2 ? VALUATION OF BONDS

 

1.

 

You're an analyst in the finance department of OverPass Corp., a

 

new firm in a profitable but risky high-tech business. Several growth

 

opportunities have presented themselves recently, but the company

 

doesn't have enough capital to undertake them. Stock prices are down,

 

so it doesn't make sense to try to raise new capital through the sale of

 

equity. The company's bank won't lend it any more money than it already

 

has, and investment bankers have said that debentures are out of the

 

question. The treasurer has asked you to do some research and suggest a

 

few ways in which bonds might be made attractive enough to allow

 

Flyover to borrow. Write a brief memo summarizing your ideas.

 

2.

 

The Everglo Corp., a manufacturer of cosmetics, is financed with a

 

50-50 mix of debt and equity. The debt is in the form of debentures,

 

which have a relatively weak indenture. Susan Moremoney, the firm's

 

president and principal stockholder, has proposed doubling the firm's debt

 

by issuing new bonds secured by the company's existing assets and using

 

the money raised to attack the lucrative but very risky European market.

 

You're Everglo's treasurer, and have been directed by Ms. Moremoney to

 

implement the new financing plan. Is there an ethical problem with the

 

president's proposal? Why? Who is likely to gain at whose expense?

 

(Hint: How are the ratings of the existing debentures likely to change?)

 

What would you do if you really found yourself in a position like this?

 

3.

 

You're the CFO of Nildorf Inc., a maker of luxury consumer goods

 

that, because of its product, is especially sensitive to economic ups and

 

downs. (People cut back on luxury items during recessionary times.) In

 

an executive staff meeting this morning, Charlie Suave, the president,

 

proposed a major expansion. You felt the expansion would be possible if

 

the immediate future looked good, but were concerned that spreading

 

resources too thin in a recessionary period could wreck the company.

 

When you expressed your concern, Charlie said he wasn't worried about

 

the economy, because the spread between AAA and B bonds is relatively

 

small, and that's a good sign. You observed, however, that rates seem to

 

have bottomed out recently and are rising along with the differential

 

between strong and weak companies. After some general discussion, the

 

proposal was tabled pending further research. Later in the day, Ed

 

Sliderule, the chief engineer came into your office and asked, "What in the

 

world were you guys talking about this morning?" Prepare a brief written

 

explanation for Ed.

 

4. Paliflex Corp. needs new capital, but is having difficulty raising it. The

 

firm?s stock price is at a ten year low, so selling new equity means giving

 

up an interest in the company for a very low price. The debt market is

 


 

tight and interest rates are unusually high, making borrowing difficult and

 

expensive. In fact, it isn?t certain that anyone will lend to Paliflex because

 

it?s a fairly risky company. On the other hand, the firm?s long-term

 

prospects are good, and management feels the stock price will recover

 

within a year or two. Ideally management would like to expand the

 

company?s equity base, so it can borrow more later on, but at the moment

 

the stock price is just too low. Suggest a capital strategy that addresses

 

both the short and long-run explaining why it is likely to work.

 

5. The Aldana Company issued a 25-year bond 5 years ago with a face

 

value of P1,000. The bond pays interest semiannually at a 10% annual

 

rate.

 

a. What is the bond's price today if the interest rate on comparable

 

new issues is 12%?

 

b. What is the price today if the interest rate is 8%?

 

c. Explain the results of parts a and b in terms of opportunities

 

available to investors.

 

d. What is the price today if the interest rate is 10%?

 

e. Comment on the answer to part d.

 

6.

 


 

Calculate the market price of a P1,000 face value bond under the

 

following conditions.

 


 

a.

 

b.

 

c.

 

d.

 

e.

 

7.

 


 

Coupon

 

Rate

 

12%

 

7%

 

9%

 

14%

 

5%

 


 

Time Until

 

Maturity

 

15 yrs

 

5 yrs

 

25 yrs

 

30 yrs

 

6 yrs

 


 

Current

 

Market Rate

 

10%

 

12%

 

6%

 

9%

 

8%

 


 

What is the current yield on each of the bonds in the previous

 

problem.

 


 

8.

 

The Sampson Company issued a P1,000 bond 5 years ago with an

 

initial term of 25 years and a coupon rate of 6%. Today?s interest rate is

 

10%.

 

a. What is the bond?s current price if interest is paid semi-annually as it

 

is on most bonds?

 

b. What is the price if the bond?s interest is paid annually? Comment on

 

the difference between a and b.

 

c. What would the price be if interest was paid semi-annually and the

 

bond was issued at a face value of $1,500?

 

9.

 

Fix-It Inc. recently issued 10-year, P1,000 par value bonds at an 8%

 

coupon rate..

 


 

a. Two years later, similar bonds are yielding investors 6%. At what

 

price are

 

Fix-Its bonds selling?

 

b. What would the bonds be selling for if yields had risen to 12%?

 

c. Assume the conditions in part a. Further assume interest rates

 

remain at 6% for the next 8 years. What would happen to the price

 

of the Fix-It bonds over that time?

 

10. The Mariposa Co. has two bonds outstanding. One was issued 25

 

years ago at a coupon rate of 9%. The other was issued 5 years ago at a

 

coupon rate of 9%. Both bonds were originally issued with terms of 30

 

years and face values of P1,000. The going interest rate is 14% today.

 

a. What are the prices of the two bonds at this time?

 

b. Discuss the result of part a. in terms of risk in investing in bonds.

 


 

 

Paper#9210850 | Written in 27-Jul-2016

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