BWFF2023 FINANCIAL MANAGEMENT II

ASSIGNMENT 1

PART A Following you will find data on RM1,000 par value bond issued by Young Corporation, Thomas Resorts and Entertainment, Inc. at the end of 2011. Assume you are thinking about buying these bonds as of January 2012. Answer the following questions of each of these bonds: 1. Calculate the value of the bonds if your required rates of return are as follows: Young Corp., 6 percent; Thomas Resorts, 9 percent; and Entertainment, Inc., 8 percent:
YOUNG CORP. Coupon interest rates Years to maturity 7.8% 10 THOMAS RESORTS 7.5% 17 ENTERTAINMENT, INC. 7.975% 4

2. In December 2011, the bonds were selling for the following amounts: Young Corp. Thomas Resorts Entertainment, Inc. RM1,030 RM973 RM1,035

What were the expected rates of return for each bond? 3. How would the value of the bonds change if i. your required rate of return (r) increases 3 percent. ii. your required rate of return (r) decreases 3 percent. 4. Explain the implications of your answers in questions 1, 2 and 3 as they relate to interest rate risk, premium bonds and discount bonds. [Hints: Relationship between coupon rates, required rates (original percentage, increases 3 %, decreases 3%) and expected rates] 5. Should you buy the bonds? Explain.

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BWFF2023 FINANCIAL MANAGEMENT II

PART B In the world of trendsetting fashion, instinct and marketing savvy are prerequisites to success. Christina Cherry had both. During 2011, her national casual-wear company, StylishWare, rocketed to RM300 million in sales after 10 years in business. The companys historical growth was so spectacular that no one could have predicted it. However, securities analysts speculated that StylishWare could not keep up the pace. They warned that competition is fierce in the fashion industry and that the firm might encounter little or no growth in the future. They estimated that stockholders also should expect no growth in future dividends. Contrary to the conservative securities analysts, Christina Cherry felt that the company could maintain a constant annual growth rate in dividends per share of 6% in the future, or possibly 8% for the next 2 years and 6% thereafter. Cherry based her estimates on an established longterm expansion plan into Asian market. Venturing into this market was expected to cause the risk of the firm, as measured by the risk premium on its stock, to increase immediately from 8.8% to 10%. Currently the risk-free rate is 6%. In preparing the long-term financial plan, StylishWares Chief Financial Officer (CFO) has assigned a junior financial analyst, Adam Reis to evaluate the firms current stock price. She has asked Reis to consider the conservative predictions of the securities analysts and the aggressive predictions of the company founder, Christina Cherry. Reis has compiled these 2011 financial data to aid his analysis: Data Earnings per share (EPS) Price per share of common stock Book value of common stock Total common shares outstanding Common stock dividend per share a. What is the firms current book value per share? b. What is the firms current P/E ratio? c. Answer: i. What is the current required return for StylishWare stock? ii. What will be the new required return for StylishWare stock assuming that they expand into Asian market as planned? d. If the securities analysts are correct and there is no growth in future dividends, what will be the value per share of the StylishWare stock? [Note: Use the new required rate in c (ii)] 2011 value RM6.25 RM40.00 RM60,000,000 2,500,000 RM4.00

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BWFF2023 FINANCIAL MANAGEMENT II

e. Answer: i. If Christina Cherrys predictions are correct, what will be the value per share of Encore stock if the firm maintains a constant annual 6% growth rate in future dividends? [Note: Use the new required rate in c (ii)] ii. If Christina Cherrys predictions are correct, what will be the value per share of StylishWare stock if the firm maintains a constant annual 8% growth rate in dividends per share over the next 2 years and 6% thereafter? f. Compare the current (2012) price of the stock and the stock values found in parts a, d, and e. Discuss why these values may differ. Which valuation method do you believe most clearly represents the true value of the StylishWare stock? INSTRUCTIONS: 1. Students will work on the assignment collaboratively in groups of Four (4) to Five (5) students. 2. Answer ALL questions. 3. The assignment must be typed on a computer and comply with the following requirements: Font: New Times New Roman Font size: 12 Line spacing: 1.5 4. The dateline for submission of the assignment is on 29 March 2012 (Thursday), before 3:30 pm. Marks will be deducted for project submitted after this date. 5. Plagiarism in all forms is forbidden. Students who submit plagiarized assignment will be penalized.

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