Financial Ratios Decision Making Case Studies

Financial Ratios Decision Making Case Studies

Alfa Company is issuing eight-year bonds with a coupon rate of 6.5 percent and semiannual

coupon payments. If the current market rate for similar bonds is 8 percent, what will be the bond

price? If the company wants to raise $1.25 million, how many bonds does the firm have to sell?

1 mark

Q2. Suppose a 3 year bond with a 6% coupon rate that was purchased for $760 and had a promised

yield of 8%. Suppose that interest rates increased and the price of the bond declined. Displeased,

you sold the bond for 798.8 after having owned it for 1 year. What is the realized yield ? 1 mark

Q3. Ahmed is interested in purchasing the common stock of Inch, Inc., which is currently priced

at $ 40. The company is expected to pay a dividend of $3 next year and to grow at a constant rate

of 8 percent. 1.5 marks

a. What should the market value of the stock be if the required rate of return is 15.75 percent?

b. Is this a good buy? Why or why not?

Q4. Case Study: 1.5 marks

Deepwater Horizon Rig Disaster Threatens Drilling

British Petroleum (BP) is an oil exploration and production company that encourages high risk

projects with the potential for high return. Last summer the company’s exploration and production

chief, Andy Inglis, is quoted as saying, “We don’t do simple things. We are prepared to work on

the frontier and manage the risks.” So far that strategy has paid off for BP. Now that strategic

decision is being called into question.

BP’s earnings for the quarter ending March 31, 2010 were $5.6 billion; more than double what

they were five years ago. However, a recent deepwater drilling rig accident in the Gulf of Mexico

killed eleven employees and has spewed over three million barrels of oil into the ocean with no

real end in sight. The company’s disaster is threatening one of the most productive fisheries in the

world and the fragile Gulf ecosystem.

From BP’s perspective the disaster may also be threatening the company’s future. If the spill is not

contained soon it may mark the end of Gulf exploration and drilling. The practice may be deemed

too risky, both politically and environmentally. For a company that has staked much of its future

on the Gulf, it may also signal the e

 

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