- BAFN200 S1, 2015 Assignment
Fortescue Metals Group (FMG)
On 5 March 2015 Fortescue Metals Group (FMG) announced a financial restructuring which involved issuing $2.5billion of new debt and the retiring of several tranches of existing debt. The intention was to extend the company’s maturity profile and reduce interest costs.
The company opened negotiations with US lenders but then turned to the US bond market as it felt the risk premium lenders required was unattractive. The bond market was equally cautious and the required (by lenders) return on the bonds was, again, deemed unattractive by FMG. On 18 March 2015 FMG announced it was not pursuing its refinancing programme.
Over the last 5 years, the share price of the company has fluctuated between a high of around $6.50 and a low of 1.85. A key driver of this price - and the company’s prospects in general - is the global price of iron ore, which has fallen considerably in the last six months. The share price of FMG over the last 5 years is shown below.
Source: Yahoo Finance, 30/5/2015
Using publicly available data:
1. Analyse the share price history of FMG over the last 5 years, identifying the main causes of its volatility in share price and traded volumes. Include in your discussion an analysis of the relationship between the iron ore price and FMG’s share price using an appropriate range of statistical analysis tools.
2. Analyse FMG’s historic cost of debt against a benchmark, “risk free” rate and derive a 95% confidence interval estimate for its average risk premium on debt. State all assumptions you make in answering the above.
Please note: Turnitin does not accept spreadsheet submissions. If you use spreadsheets in your analysis, key outputs from the spreadsheet should be pasted into the Word document submitted. Where spreadsheets have been used in your analysis, you should email copies of the live spreadsheets to the LIC with the same deadline as the other documents.