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Week 5 Tutorial Questions

The document contains tutorial questions for a financial management course, focusing on bond pricing, the valuation of redeemable and irredeemable bonds, and the implications of a rights issue for a manufacturing company. It includes specific calculations and discussions related to bond market dynamics, corporate finance strategies, and the impact of financing decisions on shareholder wealth. The questions require students to apply financial concepts to real-world scenarios involving bond issuance and rights issues.

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CHAN WEI YENG
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8 views3 pages

Week 5 Tutorial Questions

The document contains tutorial questions for a financial management course, focusing on bond pricing, the valuation of redeemable and irredeemable bonds, and the implications of a rights issue for a manufacturing company. It includes specific calculations and discussions related to bond market dynamics, corporate finance strategies, and the impact of financing decisions on shareholder wealth. The questions require students to apply financial concepts to real-world scenarios involving bond issuance and rights issues.

Uploaded by

CHAN WEI YENG
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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BBMF2814 FINANCIAL MANAGEMENT 2 RAC

Week 5 Tutorial Questions


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Question 1

“Bond price has a positive relationship with the market interest rate (yield to maturity) and when the
coupon rate of a bond is lower than the market interest rate (yield to maturity), it will normally be traded
at premium.”
Do you agree with the above statement? Discuss the relationships between bond price, market interest
rate (yield to maturity) and coupon rate.

Question 2

55 Great Berhad (55G), a leading tile manufacturer in Malaysia, produces high quality tiles encompassing
a full range of products. These include full concept wall and floor tiles, porcelain and glazed porcelain
tiles, high-end multi-effect granite tiles, as well as borders and accessories. 55G has in issue 100,000
bonds with a coupon rate of 8%, with a par value of RM100 per bond, redeemable at par in four years’
time. It has also in issue 50,000 irredeemable bonds with a coupon rate of 9%, with a par value of RM100
per bond. The after-tax cost of debt of 55G is 10%. Corporate tax is at a rate of 25%. The company is
planning to raise fund from issuance of a new corporate bond for a new project.

Required:

(a) Calculate the current market value of the redeemable bond of 55G.

(b) Calculate the current market value of the irredeemable bond of 55G.

(c) As a public listed company, discuss ANY THREE (3) types of bond which can be issued by 55G
to raise fund.

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BBMF2814 FINANCIAL MANAGEMENT 2 RAC
Week 5 Tutorial Questions
_____________________________________________________________________________________

Question 3

Tirwen Co is a medium-sized manufacturing company which is considering a 1 for 5 rights issue at a 15%
discount to the current market price of $4.00 per share. Issue costs are expected to be $220,000 and these
costs will be paid out of the funds raised. It is proposed that the rights issue funds raised will be used to
redeem some of the existing loan stock at par. Financial information relating to Tirwen Co is as follows:

Current statement of financial position

Required:

(a) Calculate the theoretical ex rights price per share and the value of rights per existing share. (3 marks)
(b) Calculate the impact of all the FOUR (4) options available to an owner of 1,000 shares in Tirwen Co
as regards the rights issue. (6
marks)
(c) Calculate the current earnings per share and the revised earnings per share if the rights issue funds
are used to redeem some of the existing loan notes.
(6 marks)
(d) Evaluate whether the proposal to redeem some of the loan notes would increase the wealth of the
shareholders of Tirwen Co. Assume that the price/earnings ratio of Tirwen Co remains constant.
(3 marks)
(e) Discuss the reasons why a rights issue could be an attractive source of finance for Tirwen Co. Your
discussion should include an evaluation of the effect of the rights issue on the debt/equity ratio and
interest cover. (7 marks)
[Total: 25 marks]

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BBMF2814 FINANCIAL MANAGEMENT 2 RAC
Week 5 Tutorial Questions
_____________________________________________________________________________________

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