Question
Credit Corp (CCP) is an Australian receivables management company which provides debt purchase and debt collection services, primarily focusing on the acquisition of purchased debt
Credit Corp (CCP) is an Australian receivables management company which provides debt purchase and debt collection services, primarily focusing on the acquisition of purchased debt ledgers (PDLs) comprised of distressed consumer debt from Australian and New Zealand banks, finance companies, and telecommunication companies. Using the last 5 years of monthly data, CCP is reported to have a beta of 0.61 compared to the ASX200. The annual risk-free interest rate is 1.5% and the expected rate of return on the market is 10% p.a. CCP had a closing price today of $17.05. It will pay a dividend of $0.75 at the end of the year.
1. What do investors expect the stock to sell for at the end of the year if they believe in the CAPM? (3 marks)
2. An analyst has forecast the following for CCP: Due to the coronavirus, dividends will grow at 7% for the next five years, after which they are expected to grow at 4% forever.
a. If the required cost of equity for the firm is 9.5%, what is the current value of the firm according to the two-stage DDM? (2marks)
b. If there are 64,518,680 shares on issue and $135 million in debt, what would be a fair value for the current stock price? (2 marks)
3. What does the beta of 0.61 tell you about the sensitivity of CCP cashflows when compared to those of the ASX200? Why do you think this might be the case? (3 marks)
4. Give an example of a firm that would have a CAPM Beta higher than 1. How would you expect the sensitivities of cash flows to vary compared to those of CCP? (3 marks)
5. Do you think CCP belongs to a defensive or cyclical sector? Why? (2 marks)
6. CCP has determined that it needs to raise more capital to fund liabilities incurred due to the pause in residential mortgage repayments during the Coronavirus epidemic. Its Chief Financial Officer (CFO) suggests issuing unsecured debt, and is considering the following two options - answer each question regarding the options:
a. A six year Zero-Coupon bond with a face-value of $100. The CFO believes that the bond can be sold for $795.
What is the implied discount rate on the zero-coupon bond? (2 marks)
b. A five year 3.5% coupon bond which would issue at par value. Face Value = $100.
Which bond do you think should be preferred? What things should be taken into consideration? (2 marks)
c. Calculate the duration of each of the bonds (2 marks)
7. CCP has issued superannuation pension guarantees. Under these guarantees, they will be required to pay $30 million in 3 years time. They would like to put some money away now at a certain interest rate to ensure they will have enough to meet their liability. Further, they are also concerned about changes in the rate at which they can invest. In order to effectively immunize their position, please answer the following questions:
a. What duration bonds should they be looking for in order to effectively immunise?
( 2 marks)
b. CCP has bought an appropriate duration bond. One year later (ie 2 years before the single-payment obligation), the government interest rate drops 2%. How does the 'immunisation' work in this case? Ie what happens to bond price? Reinvestment rate? Do you expect CCP will still be able to meet the obligation? (3 marks)
8. CCP would like to insulate themselves from potential market downturns, which they believe will negatively impact their business. Assuming the ASX200 is a close proxy for the performance of the Australian economy, how would NAB achieve this with the following instruments?
a. Futures (1 mark)
b. Forwards (1 mark)
c. Options (1 mark)
d. Which of these three different forms of hedging do you think would be preferred? Why? Make reference to cost, maturity, standardization and customizability. (1 marks)
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