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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

T Bill Future [3]Today, a Treasury bill (which carries no coupon) is selling for 91.5% (of par value). A futures contract for the delivery of the Treasury bill tomorrow carries a futures price of
Are You Lucky [5]The current value of equity in the Are You Lucky Gold Mine (AYLGM) is 50. One period from now the stock price will be one of 58.2 or 45.8. The risk free interest rate is 5% per
VaR [3]Your current portfolio of equities has a market value of 100,000. Assume normally distributed returns.1. Suppose the whole portfolio is invested in one stock. The stock has an annual expected
VaR [4]You own a portfolio with a value today of 10 million. The standard deviation of the weekly return is 0.01. Assuming that weekly returns are normally distributed, estimate Value at Risk (VaR)
Hedging [3]The stock price can next period be either 100 or 200. The stock price today is 150.You have a put option that expires next period. The exercise price of the put option is lOOo. The price
Futures Price [5]Suppose that storing the physical asset has a cost of c in the period from t to T.Show that the futures price satisfies F = 5(1 4- r) + c
Option [4]The current stock price is 160. Next period the price will be one of 150 or 175. The current risk free interest rate is 6%. You buy 1 stock and issue m call options on the stock with an
Binomial Options [4]Consider a case where the stock price S follows a binomial process. Currently, the stock price is So = 100. Each period, the stock price either moves down 10% or up 15%. The (one
Stock [2]The current price of a stock is 50. The cost of capital for the company is 10%, and the company dividend is expected to grow by 5% annually. What is the expected dividend payment next period?
Dividend Amount [4]A company is expecting after tax income of 3 million next year. The company currently has a debt/equity ratio of 80%. The company has the possibility of investing in a project with
Stable Rest [3]Stable, Inc has for the last ten years been paying out 5% of the book value of equity as dividend. Rest, Inc has for the last fifteen years been paying 80% of after tax income as
Dividends [4]The firm is capitalized by 100,000 shares of common stock which trade at the beginning of the period at 10 per share. The expected net income in period one is Xi = 200,000 and the firm
Dividends and Taxes [4]A given share is sold for $30 just before time t0. If the firm pays a $3 dividend per share, the price will immediately drop to $27. Suppose you own 100 shares. If the firm
lnfty.com [4]lnfty.com will generate forever a before-tax cash flow of $15. The corporate tax rate is 50%. The risk free rate is 10%. 20.1 Dividend Inc [2]The stock price of Dividend, Inc is 30
Tax Shield Value The general expression for the value of a leveraged firm in a world in which rg = 0 is VL = VV+^-^C))B-C{B)where Vu is the value of an unlevered firm, TC is the effective corporate
Bond [3]A company is issuing a 3 year bond with a face value of 25 million and a coupon of 10%. The company is paying taxes with 28%. The company's cost of capital is 15%.What is the value of the
LMN [3]LMN is currently all equity financed. The equity of the firm is worth 7 million. LMN is planning to issue bonds with a value of 4 million and a 10% coupon. LMN is paying 30% corporate tax.
Bond Issue [4]An firm that is currently all-equity is subject to a 30% corporate tax rate. The firm's equityholders require a 20% return. The firm's initial market value is $3,500,000, and it has
GTC [5]Note: In the question you are asked to assume risk neutrality. This means that the state price probabilities are not colored by risk aversion (fear) so they are equal to the estimated
Leverage [6]A firm has expected net operating income (X) of $600. Its value as an unlevered firm (Vu) is $2,000. The firm is facing a tax rate of 40%. Suppose the firm changes it ratio of debt to
Negative NPV? [3]Do you agree or disagree with the following statement? Explain your answer.A firm's stockholders would never want the firm to invest in projects with negative NPV.
V&M [5]Note: In the question you are asked to assume risk neutrality. This means that the state price probabilities are not colored by risk aversion (fear) so they are equal to the estimated
OFC [5]Old Fashion Corp. is an all-equity firm famous for its antique furniture business. If the firm uses 36% leverage through issuance of long-term debt, the CFO predicts that there is a 20% chance
LRC [3]You invest $100,000 in the Liana Rope Company. To make the investment, you borrowed $75,000 from a friend at a cost of 10%. You expect your equity investment to return 20%. There are no taxes.
JB [4]JB Manufacturing is currently an all-equity firm. The equity of firm is worth $2 million. The cost of that equity is 18%. JB pays no taxes. JB plans to issue$400,000 in debt and use the
Frisky [4]Frisky, Inc is financed entirely by common stock which is priced according to a 15%expected return. If the company re-purchases 25% of the common stock and substitutes an equal value of
Debt/Equity [7]Firm Z and Y have identical cash flows. Firm Z is 40% debt financed and 60% equity financed, while firm Y is 100% equity financed. The same required rate of return on their debt equals
AoB [4]AOB, Inc., has issued 2 shares of common stock and 1 convertible bond. AOB is valued at V = 100. Tomorrows value, V, will be either 150 or 50, with equal chance.The bond has a face value of
Yazee [4]Yazee is valued at V = 100. Tomorrow's value V, will be either 150 or 50, with equal chance, Yazee has issued a corporate bond with face value 100 and no coupon, to be paid tomorrow. The
Convertible [6]Suppose the firms end of period value will be:. . . f 1500 with probability 0.6 Value = < .,..., . [ 800 with probability 0.4 Today's firm value is 1000. The risk free rate is 5%. The
Projects [7]A start-up company considers two investment projects that require a $90 investment.Both are zero NPV projects (hence, the value of the project is $90). Only one project can be
[3]The Q corporation will next period realize a project that will have value either 100 or 20. This project is the only assets that Q corporation have. Q has issued a bond with face value of 50, due
Bond Covenants [3]In one or two sentences, answer the following.1. Who benefits from the covenants in bond contracts when the firm is in financial trouble? Why?2. Who benefits from the covenants in
Conversion [1]Why does conversion of convertible bonds not affect the value of the firm?
HS [4]The current price of a stock in the "Hello Sailor" entertainment company (HS) is$100. Each period the stock price either moves up by a factor u = 1.5 or down by a factor d = 1/u. (HS is in a
HAL [6]You are interested in the computer company HAL computers. Its stock is currently priced at 9000. The stock price is expected to either go up by 25% or down by 20%each six months. The annual
Call [3]The current price of the underlying is 50. This price will each period move to uS or dS, where u = 1.1 or d = 0.95. If the per period risk free interest rate is 5%, what is the price of a two
ud [2]The current price of the underlying is 100. This price will two periods from now move to either 121, 99 or 81. Find the constants u and d by which prices move each period.
MC [4]MC stock is selling for 30 per share. It is expected that the stock price will be either 25 or 35 in 6 months. Treasury bills that mature in 6 months yield 5%. (pa.). Use a state-price
Arbitrage [8]Consider the the binomial option pricing model, where the constants u and d are used to generate future states Su= uS and Sd= dS, and where r is the risk free interest rate. Show that if
A [4]The price of stocks in the "A" company is currently 40. At the end of one month it will be either 42 or 38. The risk free interest rate is 8% per annum. What is the value of a one-month European
Call Option [5]You bought a call contract three weeks ago. The expiry date of the calls is five weeks from today. On that date, the price of the underlying stock will be either 120 or 95. The two
Calls, Hedge [6]A stock's current price is $100. There are two possible prices at the end of the year:$150 or $ 75. A call option to buy one share at $100 at the end of the year sells for$20. Suppose
Call Option [4]A stock's current price is $160, and there are two possible prices that may occur next period: $150 or $175. The interest rate on risk-free investments is 6% per period.1. Assume that
Call Option [3]The current price of the underlying is 50. This price will next period move to uS or dS, where u = 1.1 or d = 0.95. If the risk free interest rate is 5%, what is the price of a call
ud [1]The current price of the underlying is 50. This price will next period move to either 48 or 60. Find the constants u and d.
Warrants [6]A firm has issued 500 shares of stock, 100 warrants and a straight bond. The warrants are about to expire and all of them will be exercised. Each warrant entitles the holder to 5 shares
Option/Warrant [2]Consider a warrant and a call option, both written on IBM stock,(a) Which of these securities has been issued by IBM?Consider two scenarios.(1) You own a warrant on IBM with
MLK [4]The current price of security MLK is 78. Next period the security will either be worth 120 or 90. The risk free interest rate is 33.33%. There are two digital options traded.One pays $1 if MLK
BoA [4]In-the-money American call options written on BoA's common stock carry a strike price of of $55 and expire in 6 months. The annualized six-month risk free rate is 10%.BoA's common stock will
MS Option [4]American call options written on Microsoft's common stock are trading for $8. They carry a strike price of $100, and expire 6 months from today. Microsoft does not pay dividends. At
Options [4]Suppose a share of stock is trading at 30, a put with a strike of 28 is trading at 1 and a call with strike 29 at 8. The maturity of both options is 1 period. The risk free rate is 20%. Is
Convexity [8]Consider three European options written on the same underlying security. The options mature on the same date. The options have different exercise prices Xi,X2 and X3.Assume X\ < X2 < X3.
American Put [4]An American put option with exercise price 50 has a time to maturity of one year.The price of the underlying security has fallen to 10 cents. The risk free interest rate is 5%.Show
Put Upper bound [5]Show that the following is an upper bound for the price of a put option P
Options [4]A put is worth $10 and matures in one year. A call on the same stock is worth $15 and matures in one year also. Both options are European. The put and call have the same exercise price of
Put Lower Bound [5]Show that the following is an lower bound on a put price Pt~ (H-r)C-t ) " S 'where Pt is the current put price, K is the exercise price, r is the risk free interest rate, (T — t)
XYZ Option [2]The current price of an American call option with exercise price 50, written on ZXY stock is 4. The current price of one ZXY stock is 56. How would you make a lot of money?
Price [2]An asset has two possible values next period, Xu= 50 and Xd= 500. If you are told that the state price probability in the u state is 0.4 and the risk free interest rate is 10%, what is the
and 0.33. What is the price of a digital option for the third state?
Digital Options [3]There are three possible states next period. The risk free interest rate is 5%, and there are two digital options traded, with prices
Probability [6]Let Is be the current price of a digital option that pays 1 if state s occurs. ps is the time 1 value of investing Is at time 0, ps= Is(l + r), where r is the one period risk free
States [4]Two possible states can occur next period, A or B. You observe the following securities:Security 12 Price 54 Payoff in state A B 10 10 10 6 1. Determine the prices of digital securities
Misui [4]Misui, Inc is a levered firm with a debt-to-equity ratio of 0.25. The beta of common stock is 1.15, while that of debt is 0.3. The market premium (expected return in excess of the risk free
EotW [5]Eyes of the World Corporation has traditionally employed a firm-wide discount rate for capital budgeting purposes. However, its two divisions, publishing and entertainment, have different
A, B&C [4]You are given the following information about three stocks Stock Expected Standard Return Deviation A O0(5 6 B 0.1 0.1 C 0.2 0.375 The correlation between B and C is 0.2 1. Suppose you
1&2 [2]A portfolio is made up of 125% of stock 1 and -25 % of stock 2. Stock 1 has a standard deviation of 0.3, and stock 2 has a standard deviation of 0.05. The correlation between the stocks is
Line [4]You can invest in two assets. One is a risk free asset yielding an interest rate of r/.The other is an asset with expected return E[ri] and standard deviation a-i- Show that combinations of
Q [2]Equity in the company Q has an expected return of 12%, a beta of 1.4 and a standard deviation of 20%. The current risk free interest is 10%. What is the current expected market return?
Portfolio [2]Stock A has an expected return of 10% and a standard deviation of 5%. Stock B has an expected return of 15% and a standard deviation of 20%. The correlation between the two is shares is
Project [3]A project with a beta of 1.5 has cash flows 100 in year 1, 200 i year 3, 500 in year 4 and 100 in year 6. The current expected market return is 10%. The risk free interest rate is 5%. What
Beta [2]Stock A has an expected rate of return of 15%. Todays expected return on the market portfolio is 10%. The current risk free interest rate is 7,5%. What is the beta of stock A?
CAPM [2]The current risk free interest rate is 5%. The expected return on the market portfolio is 14%. What is the expected return of a stock with a beta value of 0.5?
Portfolio [3]You can choose to invest in two shares, A and B:E[r] a A 12.5% 15%B 16% 20%Plot, in a mean standard deviation diagram, expected return and standard deviation for portfolios with weights
PHIAdvent [6]After extensive medical and marketing research, PillAdvent Inc, believes it can penetrate the pain reliever market. It can follow one of two strategies. The first is to manufacture a
C&C [4]The C&C company recently installed a new bottling machine. The machine's initial cost is 2000, and can be depreciated on a straight-line basis to a zero salvage in 5 years. The machine's per
Project [4]A project has a cost of 240. It will have a life of 3 years. The cost will be depreciated straight-line to a zero salvage value, and is worth 40 at that time. Cash sales will be 200 per
PI and NPV [2]Show that a project with a positive NPV will always have a profitability index greater than 1.
Machine [4]A company is considering its options for a machine to use in production. At a cost of 47 they can make some small repairs on their current machine which will make it last
Bonds [4]You are given the following information about three bonds.Bond Year of Coupon Yield to Bond Maturity Maturity Price A 2 10% 7.5862% 1,043.29 B 2 20% 7.6746% 1,220.78 C 3 8% 9.7995% 995.09
Projects [3]A project costs 100 today. The project has positive cash flows of 100 in years one and two. At the end of the life of the project there are large environmental costs resulting in a
Projects [2]Two projects A and B have the following cashflows:XQ XI X2 A -4,000 2,500 3,000 B -2,000 1,200 1,500 1. Find the Payback periods for the two projects. Which project has the shortest
Bonds [3]The current interest rate is 7%. Given the opportunity to invest in one of the three bonds listed below, which would you buy? Sell short?Bond Face Annual Maturity Price value coupon rate AB
Jane [3]Jane, a freshman in college, needs 55000 in 4 years to start studying for an MBA.Her investments earn 5% interest per year.1. How much must she invest today to have that amount at
Growing Annuity [6]Consider an T-period annuity that pays X next period. After that, the payments grows at a rate of g per year for the next T years.The present value of the annuity is Can you find a
Stock [2]The current price for a stock is 50. The company is paying a dividend of 5 next period. Dividend is expected to grow by 5% annually. The relevant interest rate is 14%. In an efficient
Annuity [6]Show that the present value of an annuity paying X per period for T years when the interest rate is r can be simplified as TPV=Y: X rj(l + r)* [r = x r{l + r)T
Growing Perpetuity [8]The present value of a perpetuity that pays Xx the first year and then grows at a rate g each year is:PV = Z t=\ (1 + r)*Show that this simplifies to *r-g
Bonds [6]You observe the following three bonds:Bond AB CPrice 95 90 85 Cashflow in period 1 2 3 100 0 0 10 110 0 10 10 110 1. What is the current value of receiving one dollar at time 3?Consider now
Stock [4]A stock has just paid a dividend of 10. Dividends are expected to grow with 10% a year for the next 2 years. After that the company is expecting a constant growth of 2% a year. The required
Bank Loans [2]Your company is in need of financing of environmental investments. Three banks have offered loans. The first bank offers 4.5% interest, with biannual compounding.The second bank offers
Arbitrage [4]You are given the following prices Pt today for receiving risk free payments t periods from now.1 = 1 2 3~~Pt = 0.95 0.9 0.95 There are traded securities that offer $1 at any future
Borrowing [2]BankTwo is offering personal loans at 10%, compounded quarterly. BankThree is offering personal loans at 10.5%, compounded annually. Which is the better offer?
Present Value [3]You are given the following prices Pt today for receiving risk free payments t periods from now.~i = 1 2 3 Pt = 0.95 0.9 0.85 1. Calculate the implied interest rates and graph the
Investing? [3]Does the following statement make sense in view of the Efficient Markets Hypothesis(EMH)?The Japanese economy has deep structural problems, which the Japanese seem reluctant to
TTC [3]TTC has released this quarter's earning report. It states that it changed how it accounts for inventory. The change does not change taxes, but the resulting earnings are 20% higher than what
Management [3]Your broker claims that well-managed firms are not necessarily more profitable investment opportunities than firms with an average management. She cites an empirical study where 17
UPS [3]On 1/10/85, the following announcement was made: "Early today the Justice Department reached a decision in the UPC case. UPC has been found guilty of discriminatory practices in hiring. For
Semistrong [3]Can you expect to earn excess returns if you make trades based on your broker's information about record earnings for a stock, rumors about a merger of a firm, or yesterday's
Interest Rates [2]Consider the following statement.Long term interest rates are at record highs. Most companies therefore find it cheaper to finance with common stock or relatively inexpensive

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