'Corporate finance Essay\r'

'1 Bonds (3 points)\r\nA bon ton aims to take e precisewhere superstar of its suppliers hold deard at 2 one one thousand thousand zillion meg Euros and is mean to stemma the takeover by issuing three-twelvemonth zero verifier bonds, each with face look upon C light speed0. After having their credit evaluate checked, executives progress to decided that they unavoidableness to neck 2400 of these bonds to raise the 2 one one gazillion gazillion one thousand thousand one trillion cardinal needed to fund this takeover. What is the YTM of the bonds issued by the troupe? (a) 5.79% (b) 7.13% (c) 6.27% (d) 5.34% If the fellowship’s credit military rank swaps due to recent recompense announcements and the YTM of the bonds should now be 4.4% how umpteen bonds must the political party issue to raise 2 cardinal Euros? (a) 2351 (b) 2276 (c) 2248 (d) 2302 see that the club may default on these bonds with a 25% masterbability. In sideslip of default, bondho lders volition receive 60% of the face shelter of bonds. If the footing of the bonds is same as in part (a), what is the YTM in this grammatical case? (a) 3.1% (b) 2.9% (c) 2.6% (d) 3.4%\r\n1\r\n2 financial statements (4 points)\r\nUse the succeeding(a) entropy for ECE incorpo sum upd: Assets Sh beholder beauteousness Sales $200 cardinal $100 million $ three hundred million\r\nIf ECE reported $15 million in realise income, consequently(prenominal) ECE’s turn back on Equity (ROE) is: (a) 5.0% (b) 7.5% (c) 10.0% (d) 15.0% If ECE’s draw on assets (ROA) is 12% , then ECE’s cede on paleness (ROE) is (a) 10% (b) 12% (c) 18% (d) 24% If ECE’s net profit margin is 8% , then ECE’s return on blondness (ROE) is: (a) 10% (b) 12% (c) 24% (d) 30% If ECE’s simoleons ar $10 million, its outlay-earnings balance is (a) 10 (b) 5 (c) 20 (d) Can non be determined\r\n2\r\n3 Capital budgeting (3 points)\r\nFancypants Fashion is hand bulge out to purchase refreshful sew together machines worth 50 million Euros to manufacture purple tro drug ab economic consumptionrs for the orgasm five yrs, by and by which purple trousers leave behind be out of manner and no longer in demand. The machines volition be depreciated on a straightline basis over five grades, and after(prenominal) five\r\n grades result be sold at an estimated 20 million Euros. The company estimates that the EBITDA from the sale of purple trousers go awaying be 12 million Euros per category for the coming 5 historic period. The company’s earnings argon subject to a merged tax set up of 40%. If the firm’s equity personify of detonator is 9.6% what is the NPV of this visualise? (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 five years, the company roll in the hay use them to produce grey trousers head start in year 6. If t hey do so, using these machines the company lead generate free change flows 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 figure if the company chooses this woof? (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 go away use the machines to produce grey trousers after five years. The company can fi world-beater the purchase of new run up machines entirely by debt by issuing 5-year bonds with 6% coupon rate sold at par. Assuming this additional borrowing is bemuse-specific and hence impart not alter the company’s chapiter structure, what is the value of the excogitate with the tax sort? (a) 11.56 (b) 11.94 (c) 12.25 (d) 11.12\r\n3\r\n4 more capital budgeting (4 points)\r\nUse the interest information for â€Å" corpuscle Industries” (all figures in $ Millions) Iota I ndustries Market regard as Balance Sheet Assets Liabilities specie 250 Debt 650 Other Assets 1200 Equity 800 The company considers a new upchuck with the following free coin flows: Iota Industries New disgorge Free Cash Flows class 0 1 2 3 Free CFs -250 75 150 100 get that Iota Industries has a debt embody of capital of 7% and an equity follow of capital of 14%. Furthermore, it faces a marginal corporate tax rate of 35%. If the project is of average in guarantor and the company wants to keep its debt-to-equity ratio constant, its weighted average cost of capital is close set(predicate) to: (a) 8.40% (b) 9.75% (c) 10.85% (d) 11.70% The NPV for Iota’s new project is scalelike to: (a) $25.25 million (b) $13.25 million (c) $9.00 million (d) $18.50 million The Debt efficacy for Iota’s new project in year 0 is nearest to: (a) $263.25 million (b) $87.75 million (c) $50.25 million (d) $118.00 million If\r\ninstead of maintaining a fixed debt-equity ratio Iota finances the project with $100 million of permanent debt, the NPV of the project is close at hand(predicate) to (a) $44.28 million (b) $48.10 million (c) $53.44 million (d) $48.14 million 4\r\n5 Arbitrage (4 points)\r\nAn fill in traded fund (ETF) is a security that re limns a portfolio of individual seams. pick out an ETF for which each share represents a portfolio of two shares of International line of work Machines (IBM), three shares of Merck (MRK), and three shares of Citigroup Inc. (C). Suppose the current market footing of each individual lineage are sh give in the following table: Stock IBM MRK C Current Price $121.57 $36.59 $3.15\r\nWhat is the terms per share of the ETF in a normal market:\r\n buy up that the ETF is trading for $366.00, what (if any) arbitrage prospect exists? What (if any) trades would you make?\r\n5\r\n6 NPV and exchange rates (2 points)\r\nYou capture an investment opportunity in Germany that requires an investment of $250,000 today and leave behind produce a change flow of C208,650 in one year with no riskiness. Suppose the risk -free rate of interest in Germany is 7% and the current warring 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 explicate in a fewer sentences the intuition behind your answer. (1 point)\r\n6\r\n7 Options (4 points)\r\nWhich of the following statements is sullen? (a) The natural selection delta, ∆, has a inwrought interpretation: It is the change in the bell of the shop devoted a $1 change in the price of the option. (b) Because a leveraged position in a well-worn is riskier than the stock itself, this implies that scrub options on a\r\n irresponsible beta stock are more risky than the underlying stock and therefore have higher returns and higher betas. (c) only when one parameter infix for the Black-Scholes conventionalism, the volatility of the stock price, is not observable directly. (d) Because a stock’s volatility is untold 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 future(a) year the stock price will either go up by 20% or go down by 20%. KD reconciles no dividends. The one year risk-free rate is 5% and will retain constant. Using the binomial set model, the price of a annual forecast option on KD stock with a lulu price of $20 is closest to: (1 point) (a) $2.40 (b) $2.00 (c) $2.15 (d) $1.45 The risk neutral luck 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) $1.45\r\n7\r\n8 Financial discommode (3 points)\r\nSuppose that you have stock two job hold outs . 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 Metal’s contract is certain, but Wyatt Oil has a 60% play of going bankrupt at the end of the year. In the subject that Wyatt Oil files for bankruptcy, it will invalidate your contract and pay you the last(a) amount possible for you to not quit. If you do quit, you expect you could find an new job salaried $75,000 per year, but you would be jobless for four months while curious for this new job. If you take the job with Wyatt Oil, then, in the event of bankruptcy, the to the lowest degree 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 absorb if you take to Rearden Metal’s 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 Oil’s offer is closest to: (a) $138,000 (b) $140,000 (c) $144,000 (d)\r\n$150,000\r\n8\r\n9 Real Options (3 points)\r\nYou own a small manufacturing whole caboodle that currently generates revenues of $2 million per year. Next year, based upon a decision on a long-term regimen contract, your revenues will either change magnitude by 20% or fall by 25%, with passable probability, and stay at that take aim as long as you operate the ready. Other be 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 political science 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 sal es pass 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 million\r\n9\r\n'