Racing is a very expensive industry to invest in. The upside is that it can be used
Question:
Racing is a very expensive industry to invest in. The upside is that it can be used to sponsor and boost the brand of automobiles and technology companies. The Max Verstappen Racing Car Co. knows that they have been doing very well on the race track this year and expects to sign many deals with sponsors and stakeholders. But when they crunch the numbers, at the end of the next year they project they will still make very little profit which is needed to reinvest in the race car engine upgrades. The owner Max doesn't understand why the projected profit could be so low and his business partner Sergio Perez calls you into a meeting, as a high-priced financial consultant to offer advice on how to use bonds to raise more money.
The Max Verstappen Racing Car Co. has a series of $1,000 par value bonds outstanding. Each of the bonds pays semi-annual interest and carries a coupon rate of 7%. Some of the bonds are due in 10 years and some in 3 years. Sergio Perez asks you for a required rate of return on bonds is 10%.
SOLVE AND ANALYZE
3A) What is the current price of the bonds with 3 years to maturity?
3B) What is the current price of the bonds with 10 years to maturity?
3C) Explain the relationship between the number of years until a bond matures and its price.
3D) Based on these numbers and the situation with the company, what financial advice would you give the 2 owners? How can they maximize profits and continue to churn out a winning team on the race track? Is there any way they can reduce their risks at the same time?
