Question
a.Anne is one of the major bondholders of StrongGrowth Plc, owning 60% of the total bonds issued by the company. She is not happy with
a.Anne is one of the major bondholders of StrongGrowth Plc, owning 60% of the total bonds issued by the company. She is not happy with how the companys bonds have performed over the last couple of years, and she is planning to make her voice heard during the next round of voting. Do you think she will be able to do so? Justify your answer. (2 marks)
b.Explain the concept of time value of money. (6 marks)
c.Pixie has inherited the family business and has decided to sell it. In exchange for her family business, Pixie has been offered an immediate payment (today, Year 0) of 450,000, with further payments of 500,000 at the end of the first year, 500,000 at the end of the second year and 750,000 at the end of the third year. The discount rate (or the opportunity cost for an investment of this type) for Pixie is 5%.
- i.Suppose a second buyer approaches Pixie and offers her 1,965,000 today for the business. Should Pixie accept the second buyers offer or accept the original offer of 450,000 and the series of payments over three years? (12 marks)
- ii.Briefly discuss what other issues should Pixie consider in deciding whether to accept the first or second offer. (4 marks)
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