Case 2 (50 marks)

World's largest oil traders investing in climate friendly projects, but profits remain a big question mark

The world's largest oil traders are pouring hundreds of millions of dollars into climatefriendly projects: including wind farms, cow manure plants, and blue hydrogen: as they seek to match the profits they make from trading oil. The energy industry as a whole faces an existential threat from the shift to a lower carbon future and faces growing pressure from investors, governments, activists and financiers to find a sustainable business model. For oil trading houses, the challenge is more acute, as their profit margins have already shrunk due to increased competition, regulatory scrutiny and growing industry transparency. Trading firms such as Vitol and Trafigura have already put money into wind farms, hydrogen, solar, EV technology, biofuels and biomethane as potential replacements for oil, traditionally their big profit driver. But like the big international oil companies they have yet to figure out what could become their new business model for an environmentally-friendly future.

Vitol is an energy and commodities company and sits at the heart of the worlds energy flows. Every day we use our expertise and logistical networks to distribute energy around the world, efficiently and responsibly.

Trafigura is one of the worlds largest independent traders of oil and petroleum products one of the few with a global presence and comprehensive product coverage handling over 6 million barrels per day.

Question 2 (20 marks)

Suppose the financial manager of Vitol suggests either issuing bonds or shares to raise capital for the environmental-friendly development plan. Assuming there is no fees or costs for the securities.

2a.) Suppose Vitol plans to issue bonds with $10,000 par value, 20 years of term to maturity, 12% coupon to be paid semi-annually, investors require 6% of return on the bond with similar risk. Calculate the price of the bonds. (4 marks)

2b.) Suppose Vitols preferred stock is expected to pay a $1 dividend every year and the required return is 9%. Calculate the price of the preferred stock. (3 marks)

2c.) Suppose Vitol just paid a dividend of $0.5 a share. It is expected its dividend to be grown by 4% per year. If the market requires a return of 12%, calculate the fair value of the stock. (3 marks)

2d.) Why the require returns in the part (i) through (iii) are different even though the issuer is the same? (10 marks)