Question

BurgerSupreme started as a business in 2012. The necessary capital was raised by issuing 10 year bonds with an 8% coupon. Over the last 5 years all major competitors have made more money than BurgerSupreme has. Sales at BurgerSupreme have been falling for the last three consecutive years, the price of its shares have lost more than 50% of their value, BurgerSupreme’s debt ratio is increasing, and sales projections for the next 12 months look very weak. BurgerSupreme outlets have 50% higher costs in wasted food utility and maintenance costs than the competition. Which of the following is true?

a. If you bought a BurgerSupreme bond today, the yield would most likely be equal to 8%

b. If you bought a BurgerSupreme bond today, the yield would most likely be lower than 8%

c. If you bought a BurgerSupreme bond today, the yield would most likely be higher than 8%

Answer 1

Burger supreme future cash inflow is likely to less positive as compare to competitors. It has more risk involved as compares the competitors. So the investors would discount the cash inflow from the burger supreme at higher rate of 8 % which is coupon rate. There is chances of default of repayment of Loan, So the yield from Bonds will be higher from the normal.

so the correct option is C . if you bought a burger supreme bond today, the yield would most likely be higher than 8*.