FINM7006 Review lecture
1. How is preferred stock like equity and how is it like long-debt?
2. What are opportunity costs? Provide an example. How do these costs affect a projects cash flow?
3. Three years ago FITAS Inc. issued a 5% corporate bond with a maturity of 6 years. The face value of the bond is $750,000. With exactly three years remaining to maturity, however, the company has run into financial difficulty and has restructured its obligations. Today’s coupon payment has already been paid, but the remaining coupon payments will be postponed until maturity. The postponed payments will accrue interest at a rate of 3.5% p.a. compounded semi-annually and will be paid as a lump sum amount at maturity along with the face value. The discount rate on the renegotiated bonds, now considered much riskier, has gone from 4% p.a. prior to the renegotiations to 9% p.a. with the announcement of the restructuring
a) What was the price of the bonds at issue (three years ago)?
b) The bond is issued above face value because the coupon rate (5%) is above the yield (4%)
c) What is the price at which the new renegotiated bond should be selling today?
4. Are the following true or false?
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