# How would the yield have been different if the company’s bonds had been shorter term?

The paper is required to be a maximum of five A4 pages (not including cover sheet and reference list) with 1.5 line spacing and font style is Times New Roman, 12 pt.

The assignment does not specify the exact amount of references needed/limited to. The subject has only one textbook which is an ebook that cannot be printed or saved as PDF to send. Please advise what requirements you need around it.

Please also advise if you need any further information.

Please note this is one of three assignments for this subject but are all due at different times. That said, assignments 2 and 3 would need to take this first one into consideration so the same writer will be required for the following papers (will be submitted separately at a later date).

Below is the exact assignment information provided:

ASSIGNMENT

This assignment has a 25% weighting in your overall mark for the unit and covers content from Weeks 1 and 2. It will be marked out of 25. Marks will be allocated as indicated for each part below. Your submission should not exceed five A4 pages, excluding cover sheet and reference list, with roughly three pages for Parts 1 and 2, and two pages for Parts 3, 4 and 5.

You must choose one of the following ASX listed companies as the context for the assignments in this unit: JB Hi-Fi Limited (JBH); Nick Scali Limited (NCK); or Retail Food Group Limited (RFG).

As well as applying the content of Weeks 1 and 2, you will need to collect real data for questions 1, 2, 3 and 5. Use DatAnalysis to collect company financial data* and the RBA site for yield data. Ensure you reference all sources of data and information you use in your assignment.

1. Use the five-step analysis process outlined at the end of the Week 1 content to undertake a financial analysis of the company you have chosen from the list above. Use data from the past two financial years. (13 marks)

Simply calculating and discussing all possible ratios without any clear justification is not the purpose of this exercise and will be viewed negatively by your marker. Instead, be concise, logical and purposeful. Interpret the figures with the context of the company in mind. Do the analysis first, consider it carefully, jot down the important conclusions and then write it up.

The 13 marks in total for this part of the assignment will allocated as follows:

Step 1 (1.5 marks)·

Step 2 (1 mark)·

Step 3 (3 marks)·

Step 4 (3 marks)·

Step 5 (2.5 marks)·

Financial data (2 marks)·

The marks for each step will be allocated based on appropriate and insightful interpretation, evaluation and contextualisation of the data. The marks for financial data will be allocated based on overall accuracy. Very few calculations are necessary, given most of the data will come straight from DatAnalysis.

2. Collect the company’s 5 year growth rate (CAGR) in operating revenue. (If the company has not been listed that long, use the 1 or 3 year rate – whichever is longer – as a proxy.) If this CAGR can be expected to continue, what is your prediction for operating revenue for the 2019/20 financial year? (1.5 marks)

3. Collect the company’s interest expense from the profit and loss statement for the year ending 30 June 2015 and divide this figure by average long-term debt in the balance sheet for the last two financial years. Use this as a very rough approximation of the quoted annual interest rate that the company would have to pay on new long-term debt. Now hypothetically assume that on 1 July 2015, the company took out a 20 year amortized loan of $500,000 to buy some equipment and that the rate of interest on that loan is fixed for the first 3 years at the rate you calculated above. The loan requires monthly payments, due on the last day of the month. How much interest will the company be able to claim as an annual tax deduction in the first financial year (1 July 2015 to 30 June 2016) and in the third financial year? (3 marks)

4. Assume that the company has just received a large amount of cash from selling assets and management wants to use this cash to repay $1 million in debt maturing in two years. In the meantime, the necessary cash will be put into a low-risk investment. It has the following investment choices: (1) a fund with a quoted fixed rate of 4.1% compounded semi-annually; (2) a fund with a quoted fixed rate of 3.90% compounded monthly; (3) zero coupon bonds maturing in two years and currently trading at $92.46 per $100 face value. Which investment fund should be chosen: 1, 2 or 3? How much cash will be invested? (2.5 marks)

5. Now assume that on 19 October 2015 the company issues 10 year, semi-annual fixed coupon bonds at par, which are given a BB rating and have a spread of 350 basis points over the yield on an Australian government bond of equivalent maturity.

a) What is the yield on the company’s bonds? (1 mark)

b) How would the yield have been different if the company’s bonds had been shorter term? Explain with reference to data and to the relevant component(s) of market interest rates. (1.5 marks)

c) You have a pessimistic outlook for the Australian economy during the coming year. Given this, what do you predict will happen to the spread on the company’s bonds over the coming year and why? Ensure you mention the relevant component(s) of market interest rates in your answer. (1 mark)

d) What do you expect to happen to the price of the company’s 10 year bonds if your prediction in part c) is correct? Illustrate your answer with a numerical example. (1.5 marks)

*In addition to raw data, DatAnalysis provides many calculated figures and ratios. Where available, use these rather than calculating them yourself. An exception to this is ROA and ROE in a DuPont analysis because the DatAnalysis definitions of these ratios are not consistent with those in their DuPont component ratios. This means the components do not multiply to give the DatAnalysis ROA and ROE. To deal with this, use the DuPont component ratios from DatAnalysis to calculate your own ROA and ROE. Note also that DatAnalysis CCC components are all based on sales revenues, instead of a COGS base for the components related to inventory and payables. This is not necessarily a problem – just be aware of it in interpretations and comparisons. Alternatively, you may wish to calculate the inventory and payables components yourself.