20 Sep business finance
Summary:
Review the financial overview and balance sheet of SONJ Fixtures and answer the questions below. Use all of the answers as well as what you learned in this course to compose a 3-4 page paper that analyzes and comments on SONJ Fixtures present and future financial situation.
SONJ Fixtures is a lighting and appliance-related fixtures manufacturer. SONJ is a relatively successful company, with strong profitability ($800,000 in net income last year) and adequate operating capital that is financed with a manageable degree of debt. SONJ is considering a project to expand its production capacity by 33%, and has a variety of financial options to consider. The expansion would cost approximately $400,000 over the next four years.
Download: Click SONJ Fixtures Balance Sheet.xlsx
SONJ is considering earning some interest on the settlement funds by purchasing 50 3-year bonds that have a par value of $1,000.00 with annual coupon payments of $65.00, at a price of $1050.00 each.
SONJ also has the option to purchase 50 3-year bonds that have a par value of $1,000.00 and annual coupon payment of $65.00. However, the market interest rate is 8%.
Another option for SONJ to raise funds is to issue stock. The risk-free rate is 4%, while the market risk premium is 7%.
What is SONJs net operating working capital? What would you recommend as the best way to increase it? Explain your recommendation.
What is SONJs debt-to-capital ratio and what is its current ratio? How much would you be willing to increase the debt-to-capital ratio and why? How much would you be willing to decrease the current ratio and why? Explain your recommendations.
If the settlement funds are to be used for the expansion, which settlement is preferable? Be sure to support you answer with specific calculations and explanations.
What is the first bond purchases yield to maturity? What is the second bond purchases price? How will this help SONJ?
Which bonds should SONJ purchase? Explain your response.
What is the required rate of return for an investor in SONJ if it has a beta of 1.3?
Does the required rate of return for buying SONJ stock increase or decrease in direct proportion to SONJs beta? Explain your answer in detail.
What specific steps might SONJ take to analyze its potential expansion project?
What are the three types of project risk SONJ might face? Explain each and how they apply to SONJ.
What are SONJs real options? List and describe each.
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