1. Sonic PLC has two bonds outstanding. One was issued 25 years ago at a coupon rate of 8%. The other was issued 5 years ago also at a coupon rate of 8%. The coupon payment is made semi-annually. Both bonds were originally issued with terms of 30 years and face values of RM1,000. The current interest rate in the market is 14%.
2. 1. Calculate the prices of the two bonds.
3. 2. Discuss the result of part i) in terms of risk of investing in bonds.
4. 3. If the bond issued five years ago is selling in the market for RM900 with a coupon rate of 8% paid semi-annually and a face value of RM1,000, what is its yield to maturity (YTM)?
5. The Vidia Group is currently financed with a 50-50 mix of debt and equity. The debt is in the form of debentures. The company is looking at ways to finance its latest project. The CEO and principal shareholder of the company was keen to finance the project by debt secured using the companys existing assets and invest some of the money raised in the lucrative but risky emerging markets. The chairman has expressed concerns on the proposal by the CEO and has asked you as the financial director to write a report addressed to board members highlighting if this proposal may pose any ethical issues and the possible impact on various stakeholders of the company.
6. Compare the relative riskiness of investment in bonds, common stock and preferred stock.
7. The Vegan Company (VGM) caters food products to a niche market of consumers who are health and religious conscious of the food they eat. Management has recently launched a new line of organic products which it believes will generate sales growth of 40% for the first three years. It is anticipated that growth will return to the normal 10% thereafter when other competitors are anticipated to enter this sector. VGM recently paid an annual dividend of RM3.60, which will grow with the company. The return on stocks for companies like VGM is typically around 15%. How much should you pay for a share of VGM today?