Maturity of company’s bonds

Maturity of company’s bonds

ACC91210 Finance for Managers (Online) Study Period 6, 2016 Assignment 1 Due date: 18th January 2017, 11PM
This assignment has a 25% weighting in your overall mark for the unit and covers content from Weeks 1 and 2. It will be marked out of 25. Marks will be allocated as indicated for each part below. Your submission should not exceed five A4 pages, excluding cover sheet and reference list, with roughly three pages for Parts 1 and 2, and two pages for Parts 3, 4 and 5.

You must choose one of the following ASX listed companies as the context for the assignments in this unit: Fantastic Holdings Limited (FAN);

As well as applying the content of Weeks 1 and 2, you will need to collect real data for questions 1, 2, 3 and 5. Use DatAnalysis to collect company financial data1 and the RBA site for yield data2. Ensure you reference all sources of data and information you use in your assignment.

The assignment is expected to be of a high quality with respect to spelling, grammar, written expression, presentation, formatting and referencing.

Question 1 – In addition to raw data, DatAnalysis provides many calculated figures and ratios. Where available, use these rather than calculating them yourself. An exception to this is ROA and ROE in a DuPont analysis because the DatAnalysis definitions of these ratios are not consistent with those in their DuPont component ratios. This means the components do not multiply to give the DatAnalysis ROA and ROE. To deal with this, use the DuPont component ratios from DatAnalysis to calculate your own ROA and ROE. Note also that DatAnalysis CCC components are all based on sales revenues, instead of a COGS base for the components related to inventory and payables. This is not necessarily a problem – just be aware of it in interpretations and comparisons. Alternatively, you may wish to calculate the inventory and payables components yourself. 2 – RBA Statistical Tables F3
Question 3. Collect the company’s interest expense from the profit and loss statement for the year ending 30 June 2016 and divide this figure by average long-term debt in the balance sheet for the last two financial years. Use this as a very rough approximation of the quoted annual interest rate that the company would have to pay on new long-term debt. (For FAN use the non-financial corporate BBB-rated bonds Yield – 10 years3). Now hypothetically assume that on 1 July 2016, the company took out a 30 year amortized loan of $300,000 to buy some equipment and that the rate of interest on that loan is fixed for the first 15 years at the rate you calculated above. The loan requires quarterly payments, due on the last day of the quarter. How much interest will the company be able to claim as an annual tax deduction in the first financial year (1 July 2016 to 30 June 2017) and in the tenth financial year? (3 marks)

Question 5. Now assume that on 29 June 2016 the company issues 10 year, semi-annual fixed coupon bonds at par, which are given a B rating and have a spread of 570 basis points over the yield on an Australian government bond of equivalent maturity.
a) What is the yield to maturity on the company’s bonds? (1 mark)
b) How would the yield to maturity have been different if the company’s bonds had been shorter term? Explain with reference to data and to the relevant component(s) of market interest rates. (1.5 marks)
c) You have an optimistic outlook for the Australian economy during the coming year. Given this, what do you predict will happen to the spread on the company’s bonds over the coming year and why? Ensure you mention the relevant component(s) of market interest rates in your answer. (1 mark)
d) What do you expect to happen to the price of the company’s 10 year bonds if your prediction in part c) is correct? Illustrate your answer with a numerical example. (1.5 marks)