FIN-317 Financial Management

Week 2- Mini-Case and Company Research

Part One: Complete the mini-case for Chapter 2.

Mini Case

On the first day of your summer internship, you’ve been assigned to work with the chief financial officer (CFO) of SanBlas Jewels Inc. Not knowing how well trained you are, the CFO has decided to test your understanding of interest rates. Specifically, she asks you to provide a reasonable estimate of the nominal interest rate for a new issue of Aaa-rated bonds to be offered by SanBlas Jewels Inc. The final format that the chief financial officer of SanBlas Jewels has requested is that of equation (2-1) in the text. Your assignment also requires that you consult the data in Table 2-2 .

Some agreed-upon procedures related to generating estimates for key variables in equation (2-1) follow.

a.The current 3-month Treasury bill rate is 2.96 percent, the 30-year Treasury bond rate is 5.43 percent, the 30-year Aaa-rated corporate bond rate is 6.71 percent, and the inflation rate is 2.33 percent.

b.The real risk-free rate of interest is the difference between the calculated average yield on 3-month Treasury bills and the inflation rate.

c.The default-risk premium is estimated by the difference between the average yields on Aaa-rated bonds and 30-year Treasury bonds.

d.The maturity-risk premium is estimated by the difference between the average yields on 30-year Treasury bonds and 3-month Treasury bills.

e.SanBlas Jewels’ bonds will be traded on the New York Bond Exchange, so the liquidity-risk premium will be slight. It will be greater than zero, however, because the secondary market for the firm’s bonds is more uncertain than that of some other jewel sellers. It is estimated at 4 basis points. A basis point is one one-hundredth of 1 percent.

Now place your output into the format of equation (2-1) so that the nominal interest rate can be estimated and the size of each variable can also be inspected for reasonableness and discussion with the CFO.

Part Two: Research companies for the final project.

o Research several companies with which you are familiar (either as a consumer, an investor, or because you know something about the company from the news). This is an informal task, and you can use the Internet for your research. Compile all articles and web pages you read when doing your research.

o Select one of the companies that you will follow throughout this course as the company you evaluate for your final assignment. Write approximately 250 words that describes why you chose that company rather than the others you researched.

o Cite your research. Cite at least two reference sources, one of which should be the selected company’s 10-K Report.

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