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Question 4: Still looking for other source of capital - creditors (20 marks) For the first time, ngela agrees that borrowing makes sense for her
Question 4: Still looking for other source of capital - creditors (20 marks) For the first time, ngela agrees that borrowing makes sense for her business in the future. Together with her savings, share capital, issuing bonds to a local bond market appears to be attractive for her listed-to-be company. However, Angela has never had any experience in involving with the financial market, in particular the bond market. Understanding bond market is effectively zero for Angela. You are tasked to provide the following expert's advice to her. Please make sure that you use a plain language to explain these complicated concepts to ensure that key messages can be delivered to her. i) What is bond and how a bond is different from stock? Please list two pros and cons of issuing bonds in comparison with doing so for stocks? How can use select a bond from the market to illustrate what Angela will get from issuing the bond for her company. [8 marks] ii) A bond issued by the ABC Corporation two years ago has finally been selected as a comparable bond for Angela's listed company in the future. This bond has 25 years to maturity at the issuance with a coupon rate of 6.0 per cent per year. Given its level of risk, investors will accept an expected return of 7.5 per cent for investing on this bond with the face value of $1,000. What should be the price of this bond? Does the estimate from your valuation appear appropriate? Explain. [5 marks] iii) Angela loves the bond's concepts but she is not convinced to pay the annual coupon payment to investors. She considers doing so will affect her cashflows? Is that possible for her to do so? If it is, then what should you advise to her given this significant change? [7 marks]
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