You are an investor in Purple Beast Ltd, an Australian manufacturer of petrol-driven sports cars.

You hold:

• 300 ordinary shares
• 200 preference shares
• 500 fixed-rate bonds
• 300 floating-rate bonds

The following information relates to your holdings:

(a) There are 1 million ordinary shares on issue, which carry full voting rights. Cumulative voting is used at the AGM.

(b) There are 1 million preference shares on issue. The preference dividend is equal to 10% of the nominal face value of $100. The company made a loss last year and no dividends were paid (although all dividends were paid in all previous years). The preference shares are cumulative.

(c) The fixed-rate bonds have a face value of $200, pay semi-annual coupon payments at a coupon rate of 8% p.a., and will mature today.

(d) The floating-rate bonds have a face value of $100 and pay semi-annual coupon payments based on BBSW plus a margin of 3%. A coupon payment is due today. The BBSW took on the following values on the following dates:

• Today: 4.1%
• 6 months ago: 4.8%
• 12 months ago: 4.9%

question 1/

The AGM is today. If the Board of Directors declares that a total of $14 million will be paid in dividends this year, how much will you receive in preference share dividends?

a.

$2000

b.

$4000

c.

$0

d.

$2800

question 2/

The AGM is today. If the Board of Directors declares that a total of $14 million will be paid in dividends this year, how much will you receive in ordinary share dividends?

a.

$4200

b.

$2400

c.

$0

d.

$1200

question 3/

What will be your final cash flow, due today, from your fixed-rate bonds?

a.

$4000

b.

$104000

c.

$100000

d.

$108000

question 4/

What will be your total coupon payment, due today, on the floating-rate bonds?

a.

$2130

b.

$2340

c.

$1170

d.

$1065

You are an investor in Purple Beast Ltd, an Australian manufacturer of petrol-driven sports cars.

The firm was established in 1985 as a private company, "went public" by issuing shares to the public in 1992 and, following an IPO, was listed on the ASX in 1996.

Earnings per share grew at more than 20% p.a. during the firm's early years. It then grew at an average of 9% per year from 1996 to 2012, but this growth in earnings began to decline by about 1% per year from 2012 to 2018 as the firm faced increasing competition from electric vehicles. However, the firm has found a niche market amongst dedicated "petrol heads", who love powerful sports cars. The firm suffered a substantial loss during 2020 and 2021, because fewer sports cars were purchased during the pandemic and the consequential lockdowns in Australia, but the company is expected to return to profitability in 2022.

The growth rate is expected to average 2% p.a. for the foreseeable future. This outlook is typical for companies in this particular "niche" industry. There are only a small number of manufacturers of these cars in Australia because of the investment required to set up a manufacturing plant. There are also only a small number of potential customers because of increasing concerns over the contribution of these cars to global warming. Although these cars can be expensive, they are still cheaper than electric sports cars, but as the price of electric cars continues to decline it is likely that manufacturers of petrol-driven cars will lose some of their business.

Although there has been a decline in revenue in recent years, profitability has been maintained (except for 2020/21) because the company has been able to drive down costs. This is largely because the departure of large car manufacturers such as General Motors and Ford from Australia over the last 5 years has meant that there are many suppliers of car components competing against each other to supply to the car manufacturing industry, and they have had to cut their prices in order to be competitive.

question 5/

How would you describe this industry's reaction to the business cycle?

a.

Cyclical

b.

Defensive

c.

Offensive

d.

Growth

question 6/

Consider Porter's 5 competitive forces:

1. Threat of entry
2. Power of suppliers
3. Power of customers
4. Threat of substitutes
5. Existing rivalry

Which two of these do you think are most likely to work against profitability of firms in this industry over the next few years?

a.

1 and 3

b.

3 and 4

c.

2 and 3

d.

1 and 2

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