Corporate finance Essay

1 Bonds (3 points)A f esteemrnity aims to putsch one of its suppliers valued at 2 one zillion gazillion million Euros and is planning to fund the takeover by exit three-year zero coupon bonds, each with face value C cytosine0. After having their credit rating checked, executives have persistent that they need to issue 2400 of these bonds to raise the 2 million needed to fund this takeover. What is the YTM of the bonds issued by the company? (a) 5.79% (b) 7.13% (c) 6.27% (d) 5.34% If the companys credit rating changes due to recent lucre announcements and the YTM of the bonds should now be 4.4% how many bonds essential the company issue to raise 2 million Euros? (a) 2351 (b) 2276 (c) 2248 (d) 2302 judge that the company may default on these bonds with a 25% probability. In case of default, bondholders result receive 60% of the face value of bonds. If the hail of the bonds is same as in part (a), what is the YTM in this case? (a) 3.1% (b) 2.9% (c) 2.6% (d) 3.4%12 Financia l statements (4 points) consumption the following information for ECE incorpo treadd Assets Shareholder Equity Sales $200 million $100 million $300 millionIf ECE reported $15 million in net income, then ECEs homecoming on Equity (ROE) is (a) 5.0% (b) 7.5% (c) 10.0% (d) 15.0% If ECEs return on assets (ROA) is 12% , then ECEs return on equity (ROE) is (a) 10% (b) 12% (c) 18% (d) 24% If ECEs net prot valuation account is 8% , then ECEs return on equity (ROE) is (a) 10% (b) 12% (c) 24% (d) 30% If ECEs earnings are $10 million, its impairment-earnings ratio is (a) 10 (b) 5 (c) 20 (d) Cannot be driven23 Capital budgeting (3 points)Fancypants Fashion is going to purchase new sewing machines worth 50 million Euros to manufacture purple trousers for the coming ve years, subsequently which purple trousers give be out of form 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 sale of purple trousers will be 12 million Euros per year for the coming 5 years. The companys earnings are subject to a corpo roll tax rate of 40%. If the rms equity court of ceiling is 9.6% what is the NPV of this project? (a) 0.48 million Euros (b) 0.72million Euros (c) 0.26 million Euros (d) 0.92 million Euros Instead of selling the machines after ve years, the company rear use them to produce grey trousers starting in year 6. If they do so, using these machines the company will generate innocent cash ows of 2 million Euros per year in perpetuity, since grey trousers are classics and neer 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. The company can fag the purchase of new sewing machines entirely by debt by issuing 5-year bonds with 6% coupon rate sold at par. Assuming this additional borrowing is project-specic and hence will not motley the companys capital structure, what is the value of the project with the tax shield? (a) 11.56 (b) 11.94 (c) 12.25 (d) 11.1234 to a greater extent capital budgeting (4 points)Use the following information for Iota Industries (all gures in $ Millions) Iota Industries Market Value labyrinthine sense Sheet 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 Free Cash Flows Year 0 1 2 3 Free CFs -250 75 150 100 Assume that Iota Industries has a debt greet of capital of 7% and an equity cost of capital of 14%. Furthermore, it faces a marginal corporate tax rate of 35%. If the project is of average risk and the company wants to keep its debt-to-equity ratio constant, its weighted average cost of capital is approximate to (a) 8.40% (b) 9.75% (c) 10.85% (d) 11.70% The NPV for Iotas new project is closest 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 exchange traded fund (ETF) is a security that re gives a portfolio of individual stocks. Consider an ETF for which each dowry represents a portfolio of dickens shares of International Business Machines (IBM), three shares of Merck (MRK), and three shares of Citigroup Inc. (C). Suppose the current market harm of each individual stock are shown in the following table Stock IBM MRK C live Price $121.57 $36.59 $3.15What is the exp block offitu re 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 some sentences the intuition behind your answer. (1 point)67 Options (4 points)Which of the following statements is false? (a) The option delta, , has a natural rendering It is the change in the price of the stock given a $1 change in the price of the option. (b) Because a leveraged position in a stock is riskier than the stock itself, this implies that ca ll options on a collateral beta stock are more risky than the underlying stock and therefore have high 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 measure (and forecast) than its expected 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 pays no dividends. The one year risk-free rate is 5% and will remain constant. Using the binomial determine 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 neutral 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 price model, the price of a one-year call option on KD stock with a strik e 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 protracts. Rearden Metal offers you a contract for $75,000 per year for the next two years while Wyatt anele offers you a contract for $90,000 per year for the next two years. Both 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 event that Wyatt Oil les for bankruptcy, it will cancel your contract and pay you the lowest tote up contingent 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 fired for four months while searching for this new job. If you take the job with Wyatt Oil, then, in the event of bankruptcy, 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 Assuming your cost of capital is 6 percent , the present value of your expected wage 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 plant 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 increase by 20% or fall down by 25%, with equal probability, and beat at that level as long as you operate the plant. Other costs 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 government 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