Case 3: Cases in Financial Management: Home Products

Table of Contents

A) Summary of Company Background

B) Long-Term Debt (Bonds)

a) Current Yield, YTC, and YTM

b) Comparing time and maturity

C) Preferred Stock

a) Required Rate of Return (preferred stock)

b) In event of liquidation (preferred stock)

D) Common Stock

a) Dividend and Capital Gain Yield

b) Required Rate of Return (Constant Growth Model)

c) Required Rate of Return (Capital Asset Pricing Model)

d) Price Value of Common Stock (Constant Growth Model)

E) Recommendations

F) Calculations

Background Information

Home Products, Inc. is a leading manufacturer of prescription and ethical drugs; specialty foods and candies; and proprietary drugs. The company is best known for products names that include Advil, Anacin, Dimetapp, Norplant, and Robitussin. With the total revenues of the company reporting total revenue in excess of $9 billion dollars, the current CEO is looking to move forward with some new developments in the surrounding area. In order to obtain this goal, ZEN consulting was asked to come in and look at the possibility of funding their new development through stocks and bonds.

Long-Term Debt (Bonds)

Currently HPI has two large domestic long-term bonds in the form of a 9 1/8 percent coupon bond selling for $930 and a 9 percent coupon bond that is selling for $972.50. The 9 1/8 percent bond is callable in seven years at a premium of 104.4375. This means in seven years HPI can call in their bond if the rates are lower, saving the company money in interest payments on the bond. In order to do this they would have to pay 104.4375% of the principle instead of just 100% in final repayment at maturity. If the company doesn’t call the 9 1/8 percent bond in 7 years, it will mature in 26 years. The 9 percent bond will mature in 9 years. Moody’s gave both bonds a rating of A, which means to investors the chance of default is slim. The worse the rating the company gets, the higher...