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SONJ is considering earning some interest on the settlement funds by purchasing 50 3-year bonds that have a par value of $1,000.00 with annual coupon
SONJ is considering earning some interest on the settlement funds by purchasing 50 3-year bonds that have a par value of $1,000.00 with annual coupon payments of $65.00, at a price of $1050.00 each.
SONJ also has the option to purchase 50 3-year bonds that have a par value of $1,000.00 and annual coupon payment of $65.00. However, the market interest rate is 8%.
Another option for SONJ to raise funds is to issue stock. The risk-free rate is 4%, while the market risk premium is 7%.
- What is SONJ's net operating working capital? What would you recommend as the best way to increase it? Explain your recommendation.
- What is SONJ's debt-to-capital ratio and what is its current ratio? How much would you be willing to increase the debt-to-capital ratio and why? How much would you be willing to decrease the current ratio and why? Explain your recommendations.
- If the settlement funds are to be used for the expansion, which settlement is preferable? Be sure to support you answer with specific calculations and explanations.
- What is the first bond purchase's yield to maturity? What is the second bond purchase's price? How will this help SONJ?
- Which bonds should SONJ purchase? Explain your response.
- What is the required rate of return for an investor in SONJ if it has a beta of 1.3?
- Does the required rate of return for buying SONJ stock increase or decrease in direct proportion to SONJ's beta? Explain your answer in detail.
- What specific steps might SONJ take to analyze its potential expansion project?
- What are the three types of project risk SONJ might face? Explain each and how they apply to SONJ.
- What are SONJ's real options? List and describe each.
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