Case Study
De La Salle Professional Schools Inc.
Peachtree Securities, Inc. (B) A Case Analysis
Submitted to: Prof. Benel Lagua
In Partial Fulfillment of the Course Requirement In Financial Management
Submitted by: Cheng, Cindie Domo-ong, Kathleen Mendoza, Elissa Santos, Ana Liza Group 4 August 28, 2010
After a successful lecture on risk and return, Laura Donahue, a recently hired utility analyst for Peachtree Securities, Inc., was tasked by its president, Jack Taylor, to determine the value of TECO Energy’s securities (common stock, preferred stock and bonds) and then conduct a seminar to explain the process to the firm’s customers. To do this, Laura first reviewed the Value Line Investment Survey data and examined TECO’s latest Annual Report, especially Note E of its Consolidated Financial Statements (lists TECO’s long-term debt obligations, including its first-mortgage bonds, installment contracts and term loans, See Table 1). Table 1: Partial Long-term Debt Listing for TECO Energy. Face Amount $ 48,000,000 32,000,000 100,000,000 Coupon Rage 4.5% 8.25 12.625 Maturity Year 1997 2007 2017 Years to Maturity 5 15 25
A current concern that is plaguing the industry is a phenomenon called “Event risk”. This is when the credit rating of a firm’s existing bonds drop, its required rate of return increase and then its price of bonds decline. This is the effect due to the high-risk “junk” bonds issued to finance leveraged buyouts (LBOs) and debt-financed corporate takeovers. Seeing this is trend, Laura was tasked to see if this could affect the required returns on TECO’s outstanding bonds. To do this, she will have to answer the following questions:
1. To begin, assume that it is now January 1, 1993 , and that each bond in Table 1 matures on December 31 of the year listed. Further, assume that each bond has a $1,000 par value, each had a 30-year maturity when it was issued, and the bonds currently have a 10 percent required nominal rate of return 1a . Why do the
Peachtree Securities, Inc. (B) A Case Analysis
Submitted to: Prof. Benel Lagua
In Partial Fulfillment of the Course Requirement In Financial Management
Submitted by: Cheng, Cindie Domo-ong, Kathleen Mendoza, Elissa Santos, Ana Liza Group 4 August 28, 2010
After a successful lecture on risk and return, Laura Donahue, a recently hired utility analyst for Peachtree Securities, Inc., was tasked by its president, Jack Taylor, to determine the value of TECO Energy’s securities (common stock, preferred stock and bonds) and then conduct a seminar to explain the process to the firm’s customers. To do this, Laura first reviewed the Value Line Investment Survey data and examined TECO’s latest Annual Report, especially Note E of its Consolidated Financial Statements (lists TECO’s long-term debt obligations, including its first-mortgage bonds, installment contracts and term loans, See Table 1). Table 1: Partial Long-term Debt Listing for TECO Energy. Face Amount $ 48,000,000 32,000,000 100,000,000 Coupon Rage 4.5% 8.25 12.625 Maturity Year 1997 2007 2017 Years to Maturity 5 15 25
A current concern that is plaguing the industry is a phenomenon called “Event risk”. This is when the credit rating of a firm’s existing bonds drop, its required rate of return increase and then its price of bonds decline. This is the effect due to the high-risk “junk” bonds issued to finance leveraged buyouts (LBOs) and debt-financed corporate takeovers. Seeing this is trend, Laura was tasked to see if this could affect the required returns on TECO’s outstanding bonds. To do this, she will have to answer the following questions:
1. To begin, assume that it is now January 1, 1993 , and that each bond in Table 1 matures on December 31 of the year listed. Further, assume that each bond has a $1,000 par value, each had a 30-year maturity when it was issued, and the bonds currently have a 10 percent required nominal rate of return 1a . Why do the