Corporate finance Essay

1 Bonds (3 points)A association aims to coup detat wholeness of its suppliers rankd at 2 billion Euros and is planning to fund the way outover by issuing common chord-year zero coupon bonds, distributively with face value C1000. After having their credit rating checked, executives have firm that they need to vent 2400 of these bonds to wind the 2 unrivaled thousand thousand needed to fund this takeover. What is the YTM of the bonds issued by the comp any(prenominal)? (a) 5.79% (b) 7.13% (c) 6.27% (d) 5.34% If the companys credit rating changes due to recent dough announcements and the YTM of the bonds should now be 4.4% how many bonds must the company issue to raise 2 one one thousand cardinal gazillion Euros? (a) 2351 (b) 2276 (c) 2248 (d) 2302 Suppose that the company may default on these bonds with a 25% probability. In case of default, bondholders forgeting receive 60% of the face value of bonds. If the worth of the bonds is same as in quality (a), what is th e YTM in this case? (a) 3.1% (b) 2.9% (c) 2.6% (d) 3.4%12 fiscal statements (4 points)Use the next instruction for ECE incorporated Assets Shareholder faithfulness Sales $200 zillion $100 million $300 millionIf ECE reported $15 million in net income, then ECEs Return on Equity (ROE) is (a) 5.0% (b) 7.5% (c) 10.0% (d) 15.0% If ECEs pass on assets (ROA) is 12% , then ECEs return on equity (ROE) is (a) 10% (b) 12% (c) 18% (d) 24% If ECEs net prot margin is 8% , then ECEs return on equity (ROE) is (a) 10% (b) 12% (c) 24% (d) 30% If ECEs earnings are $10 million, its monetary value-earnings ratio is (a) 10 (b) 5 (c) 20 (d) Can non be determined23 Capital budgeting (3 points)Fancypants counterfeit is going to purchase new sewing machines worth 50 million Euros to manufacture purple trousers for the glide path ve years, after which purple trousers will be out of fashion and no longer in demand. The machines will be depreciated on a straightline basis over ve years, and after veyears will be sold at an estimated 20 million Euros. The company estimates that the EBITDA from the trade of purple trousers will be 12 million Euros per year for the coming 5 years. The companys earnings are subject to a corporate tax rate of 40%. If the rms equity toll of capital is 9.6% what is the NPV of this protrude? (a) 0.48 million Euros (b) 0.72million Euros (c) 0.26 million Euros (d) 0.92 million Euros Instead of interchange the machines after ve years, the company basin use them to produce canescent trousers startle in year 6. If they do so, using these machines the company will submit free cash ows of 2 million Euros per year in perpetuity, since grey trousers are classics and never go out of fashion. What is the NPV of the project if the company chooses this option? (a) 5.89 million Euros (b) 5.72 million Euros (c) 6.36 million Euros (d) 6.07 million Euros Suppose that the company has decided that they will use the machines to produce grey trousers after ve years. T he company can nance the purchase of new sewing machines entirely by debt by issuing 5-year bonds with 6% coupon rate sold at par. anticipate this additional borrowing is project-specic and hence will not commute the companys capital structure, what is the value of the project with the tax buckler? (a) 11.56 (b) 11.94 (c) 12.25 (d) 11.1234 More capital budgeting (4 points)Use the following information for element Industries (all gures in $ Millions) Iota Industries Market Value Balance opinion poll Assets Liabilities Cash 250 Debt 650 Other Assets 1200 Equity 800 The company considers a new project with the following free cash ows Iota Industries New Project open Cash Flows Year 0 1 2 3 let loose CFs -250 75 150 100 Assume that Iota Industries has a debt exist of capital of 7% and an equity monetary value of capital of 14%. Further more, it faces a marginal corporate tax rate of 35%. If the project is of sightly risk and the company wants to keep its debt-to-equity ratio co nstant, its weighted average equal of capital is nighest to (a) 8.40% (b) 9.75% (c) 10.85% (d) 11.70% The NPV for Iotas new project is walk-to(prenominal) to (a) $25.25 million (b) $13.25 million (c) $9.00 million (d) $18.50 million The Debt Capacity for Iotas new project in year 0 is closest to (a) $263.25 million (b) $87.75 million (c) $50.25 million (d) $118.00 million Ifinstead of maintaining a xed debt-equity ratio Iota nances the project with $100 million of permanent debt, the NPV of the project is closest to (a) $44.28 million (b) $48.10 million (c) $53.44 million (d) $48.14 million 45 Arbitrage (4 points)An substitute traded fund (ETF) is a security that represents a portfolio of individual inventoryings. Consider an ETF for which each share represents a portfolio of two shares of International Business Machines (IBM), three shares of Merck (MRK), and three shares of Citigroup Inc. (C). Suppose the current commercialize equipment casualty of each individual phone li ne are shown in the following table Stock IBM MRK C modern Price $121.57 $36.59 $3.15What is the impairment per share of the ETF in a normal marketAssume that the ETF is trading for $366.00, what (if any) arbitrage opportunity exists? What (if any) trades would you make?56 NPV and exchange rates (2 points)You have an investment opportunity in Germany that requires an investment of $250,000 today and will produce a cash ow of C208,650 in one year with no risk. Suppose the risk -free rate of interest in Germany is 7% and the current competitive exchange rate is C0.78 to $1.00. What is the NPV of this project? Would you take the project? (1 point) (a) NPV = 0 No (b) NPV = 2,358 No (c) NPV = 2,358 Yes (d) NPV = 13,650 Yes Explain in a few sentences the intuition behind your answer. (1 point)67 Options (4 points)Which of the following statements is ridiculous? (a) The option delta, , has a natural interpretation It is the change in the price of the stock given a $1 change in the pric e of the option. (b) Because a leveraged position in a stock is riskier than the stock itself, this implies that invite options on apositive beta stock are more risky than the underlying stock and therefore have higher(prenominal) returns and higher betas. (c) Only one parameter input for the Black-Scholes formula, the volatility of the stock price, is not observable directly. (d) Because a stocks volatility is much easier to legal community (and forecast) than its evaluate return, the Black-Scholes formula can be very precise. The current price of KD Industries stock is $20. In the next year the stock price will either go up by 20% or go down by 20%. KD take overs no divid curios. The one year safe rate is 5% and will remain constant. Using the binomial set model, the price of a one-year call option on KD stock with a strike price of $20 is closest to (1 point) (a) $2.40 (b) $2.00 (c) $2.15 (d) $1.45 The risk deaf(p) probability of an up state for KD Industries is closest to (a) 37.5% (b) 60.0% (c) 40.0% (d) 62.5% Using the risk-neutral pricing model, the price of a one-year call option on KD stock with a strike price of $20 is closest to (1 point) (a) $2.40 (b) $2.00 (c) $2.15 (d) $1.4578 Financial Distress (3 points)Suppose that you have received two job offers. Rearden admixture offers you a contract for $75,000 per year for the next two years charm Wyatt inunct offers you a contract for $90,000 per year for the next two years. both(prenominal) jobs are equivalent. Suppose that Rearden Metals contract is certain, but Wyatt Oil has a 60% chance of going bankrupt at the end of the year. In the concomitant that Wyatt Oil les for bankruptcy, it will cancel your contract and pay you the lowest amount possible for you to not quit. If you do quit, you expect you could nd an new job paying $75,000 per year, but you would be unemployed for foursome months while searching for this new job. If you take the job with Wyatt Oil, then, in the event of bankru ptcy, the least amount that Wyatt Oil would pay you next year is closest to (a) $45,000 (b) $50,000 (c) $54,000 (d) $75,000 presume your cost of capital is 6 percent, the present value of your expected pay if you accept Rearden Metals offer is closest to (a) $133,000 (b) $138,000 (c) $140,000 (d) $144,000 Assuming your cost of capital is 6 percent, the present value of your expected wage if you accept Wyatt Oils offer is closest to (a) $138,000 (b) $140,000 (c) $144,000 (d)$150,00089 Real Options (3 points)You own a small manufacturing be that currently generates revenues of $2 million per year. Next year, based upon a decision on a long-term government contract, your revenues will either gain by 20% or devolve by 25%, with equal probability, and stay at that level as long as you operate the plant. Other cost run $1.6 million dollars per year. You can sell the plant at any time to a large conglomerate for $5 million and your cost of capital is 10%. If you are awarded the govern ment contract and your sales increase by 20%, then the value of your plant will be closest to (a) $5 million (b) $8 million (c) $0 (d) $4 million If you are not awarded the government contract and your sales decrease by 25%, then the value of your plant will be closest to (a) -$1 million (b) $5 million (c) $8 million (d) $0 Given the embedded option to sell the plant, the value of your plant will be closest to (a) $5.0 million (b) $4.0 million (c) $6.5 million (d) $8.0 million9