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fundamentals of corporate finance

Questions and Answers of Fundamentals Of Corporate Finance

=11/You are only prepared to forego immediate spending if you get a 9% return on your investment. What would be the top price you would be prepared to pay for a security today that would pay you 121
=12/If instead of throwing his 30 pieces of silver away in 33 AD, Judas had invested them at 3% per annum, how much would his descendants get in 2014? And at 1%? Explain your views.
=13/You have the choice between buying a Francis Bacon painting for €100 000 which will be worth €125 000 in four years, and investing in government bonds at 6%. What would your choice be? Why?
=14/Given the level of risk, you require an 12% return on shares in Google. No dividends will be paid out for five years. What is the lowest price you could sell them at in four years’time, if you
=15/Assume that a share in Le Furibard has a market value of 897, with the following cash flow schedule:Year 1 2 3 4 5 Cash flow 300 300 300 300 300 Calculate the NPV of the share at 5%, 10%, 20% and
=17/What is the present value at 10% of €100 paid annually for three years? Same question for a perpetual income.
=18/An investment promises four annual payments of €52 over the next four years. You require an 8% return. How much would you be prepared to pay for this asset? The share is currently trading at
=19/Show that at 8% there is little difference between the value of a perpetual income and that of a security that offers a constant annual income equal to that of the perpetual income for only 40
=21/You are the proud owner of the TV screening rights for the film Singing in the Rain. You sell the rights to screen the film on TV once every two years for €0.8m. What is the value of your
=24/Every year you invest €1 200 for your pension. You started at age 25. How much will you own at 65 if your investment has yielded 4% p.a? If you wanted to have €200 000, how much would you
=25/ At what price should you sell Mondass shares in 10 years’ if the share pays a €1 dividend each year and you require a 6.67% return, knowing that Mondass’ current share price is€15? The
=3/ Does the interest rate depend on when cash flows occur?
=4/ What are proportional rates?
=5/ What is the internal rate of return?
=6/ What are proportional rates used for? And the internal rate of return?
=1/ What interest rate on an investment would turn 120 into 172.8 over two years? What is the yield to maturity? What is the proportional rate over three months?
=2/ What is the terminal value on an initial investment of 100 if the investor is seeking a 14%yield to maturity after seven years?
=4/ You invest €1000 today at 6% with interest paid on a half-yearly basis for four years.What is the yield to maturity of this investment? How much will you have at the end of the four-year period?
=5/ Investment A can be bought for 4 and will earn 1 per year over six years. What is the yield to maturity? Investment B costs 6 and earns 2 over two years, then 1.5 over three years.What is the
=6/ A company treasurer invests 100 for 18 months. The first bank he approaches offers to reinvest the funds at 0.8% per quarter, and the second bank at 1.6% per half-year.Without actually doing the
=7/ A company treasurer invests €10 000 000 on the money market for 24 days. He gets back€10 019 745. What is the rate of return over 24 days? What is the yield to maturity?
=8/ Draw up a repayment schedule for a loan of 100, with a yield to maturity of 7% over four years, showing repayment in fixed annual instalments and constant amortisation.
=9/ Draw up a repayment schedule for a loan of 400, with a yield to maturity of 6.5% over seven years with repayment deferred for two years, showing repayment in fixed annual instalments and constant
=13/ Calculate the yield to maturity of the following investment, which can be purchased today for 1000:Year 1 2 3 4 5 Cash flow 232 2088 232 -232 -927
=1/How is risk measured in a market economy?
=2/What does the β coefficient measure?
=3/In the graph on page 305, which is the most volatile asset? What motivates investors to enter this market?
=5/Is the Air Liquide share more or less risky than the whole of the market? Why?
=6/Upon what is the β coefficient dependent?
=7/Why are market risk and specific risk totally independent?
=10/Explain why it is unhealthy for a company to invest its cash in shares.
=11/Is the β of a diversified conglomerate close to 1? Why?
=12/Internet companies have low fixed costs and low debt levels, yet their β coefficients are high. Why?
=13/Is the β coefficient of a group necessarily stable over time? Why?
=14/You buy a lottery ticket for €100 on which you could win €1 000 000, with a probability rate of 0.008%. Is this a risky investment? Could it be even riskier? How could you reduce the risk?
=15/Why is standard deviation preferable to variance?
=16/What law of statistics explains that in the long term, risk disappears? State your views.
=17/You receive €100 000 which you decide to save for your old age. You are now 20. What sort of investment should you go for? Perform the same analysis as if it happened when you are 55 and 80.
=18/Do shares in Internet companies carry a greater or smaller risk than shares in large retail groups? Why?
=19/There are some sceptics who claim that financial analysis serves no purpose. Why? State your views.
=20/Why are negative β coefficients unusual?
=21/What can you say about a share for which the standard deviation of the return is high, and the β is low?
=22/Must the values of financial assets fluctuate in opposite directions in order to reduce risk? Why?
=23/What other concept does the capital market line bring to mind?
=24/Why does the market portfolio include all risky assets?
=26/The correlation coefficient between French equities and European equities developed as follows:Years 1970–1979 1980–1989 1990–1999 2000–2009 Coefficient 0.43 0.42 0.73 0.996 Are you
=27/Use the table on page 314 to determine which industrial sector makes the greatest contribution to reducing the risk of a portfolio.
=28/What is the only asset that can be used to precisely measure the levels of risk of a portfolio?
=29/What conditions are necessary for a risk-free asset to be free of risk? Provide an example.Is it really risk-free?
=30/Show that the market portfolio must be on the capital market line and on the portion of the curve called the efficient frontier (see Section 18.7).
=31/ Why does this chapter provide an explanation of the development of mutual funds?
= 33/Under what circumstances can the risk of a portfolio be less than the individual risk of each of the securities it contains?
= 35/ Will very wide diversification eliminate specific risk? And market risk?
=1/Calculate the return on the ENI share and on the Italian index over 13 months until 1 January 2011. To help you, you have a record of the share price and of the general index.What is the total
= What is the β coefficient of ENI? What portion of the total risk of the ENI share is explained by market risk?EXERCISES Period Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10
= 2/ A portfolio gives a 10% return with a standard deviation of 18%. You would like the standard deviation to drop to 14%. What should you do? What should you do if you want the standard deviation
= 3/Calculate the risk and returns of portfolio Z in Section 18.7. What is the proportion of Heineken shares and Ericsson shares in this portfolio?
= 4/A portfolio gives a 10% return for a standard deviation of 18%. The shares in companies C and D have the following returns and standard deviations:C D Expected return (%) 10 20 Standard deviation
= (a) Calculate the expected return and the standard deviation for each of the following portfolios:α : 100% ; : 75% 25% ; : 50% 50% ; : 25% 75% ; β δ: 100%C CD CD CD D+ ++ σε
= (b) Plot your results on a graph. What are your conclusions?
1. (PRICE) In February 2009, Treasury 8.5s of 2020 yielded 3.30%. What was their price? If the yield rose to 4%, what would happen to the price?
2. (YLD) On the same day, Treasury 3.5s of 2018 were priced at 107.469%. What was their yield to maturity? Suppose that the price was 110.0%. What would happen to the yield?
3. (DURATION) What was the duration of the Treasury 8.5s? How would duration change if the yield rose to 4%? Can you explain why?
4. (MDURATION) What was the modified duration of the Treasury 8.5s? How would modified duration differ if the coupon were only 7.5%?
1. Bond prices and yields (S3.1) A 10-year bond is issued with a face value of $1,000, paying interest of $60 a year. If interest rates increase shortly after the bond is issued, what happens to the
2. Bond prices and yields (S3.1) The following statements are true. Explain why.a. If a bond’s coupon rate is higher than its yield to maturity, then the bond will sell for more than face value.
b. If a bond’s coupon rate is lower than its yield to maturity, then the bond’s price will increase over its remaining maturity.
3. Bond prices and yields (S3.1) Construct some simple examples to illustrate your answers to the following:a. If interest rates rise, do bond prices rise or fall?b. If the bond yield to maturity is
4. Bond prices and yields (S3.1) A 10-year German government bond (bund) has a face value of €100 and a coupon rate of 5% paid annually. Assume that the interest rate (in euros) is equal to 6% per
5. Bond prices and yields (S3.1) In December 2020, Treasury 41/4s of 2040 offered a semiannually compounded yield to maturity of 1.32%. Recognizing that coupons are paid semiannually, calculate the
6. Bond prices and yields (S3.1) A 10-year U.S. Treasury bond with a face value of $1,000 pays a coupon of 5.5% (2.75% of face value every six months). The reported yield to maturity is 5.2% (a
7. Bond prices and yields (S3.1) Choose 10 U.S. Treasury bonds with different coupons and different maturities. Calculate how their prices would change if their yields to maturity increased by 1
8. Bond returns (S3.1) If a bond’s yield to maturity does not change, the return on the bond each year will be equal to the yield to maturity. Confirm this with a simple example of a fouryear bond
9. Bond returns (S3.1)a. An 8%, five-year bond yields 6%. If this yield to maturity remains unchanged, what will be its price one year hence? Assume annual coupon payments and a face value of
10. Bond returns (S3.1) A six-year government bond makes annual coupon payments of 5% and offers a yield of 3% annually compounded. Suppose that one year later the bond still yields 3%. What return
11. Duration (S3.2) True or false? Explain.a. Longer-maturity bonds necessarily have longer durations.b. The longer a bond’s duration, the lower its volatility.c. Other things equal, the lower the
12. Duration (S3.2) Here are the prices of three bonds with 10-year maturities:Bond Coupon (%) Price (%)2% 81.62%4 98.39 8 133.42
If coupons are paid annually, which bond offered the highest yield to maturity? Which had the lowest? Which bonds had the longest and shortest durations?
13. Duration (S3.2) Calculate the durations and volatilities of securities A, B, and C. Their cash flows are shown below. The interest rate is 8%.Period 1 Period 2 Period 3 A 40 40 40 B 20 20 120 C
14. Duration (S3.2) Calculate durations and modified durations for the 3% bonds in Table 3.2.You can follow the procedure set out in Table 3.4 for the 9% coupon bonds. Confirm that modified duration
15. Duration (S3.2) Find the spreadsheet for Table 3.4 in Connect. Show how duration and volatility change if (a) the bond’s coupon is 8% of face value and (b) the bond’s yield is 6%.Explain your
16. Duration (S3.2) The formula for the duration of a perpetual bond that makes an equal payment each year in perpetuity is (1 + yield)/yield. If each bond yields 5%, which has the longer
17. Spot interest rates and yields (S3.3) Which comes first in the market for U.S. Treasury bonds:a. Spot interest rates or yields to maturity?b. Bond prices or yields to maturity?
18. Spot interest rates and yields (S3.3) Look again at Table 3.6. Suppose that spot interest rates all change to 4%—a “flat” term structure of interest rates.a. What is the new yield to
19. Spot interest rates and yields (S3.3) Look again at Table 3.6. Suppose the spot interest rates change to the following downward-sloping term structure: r1 = 4.6%, r2 = 4.4%, r3 = 4.2%, and r4 =
20. Spot interest rates and yields (S3.3) Look at the spot interest rates shown in Problem 19.Suppose that someone told you that the five-year spot interest rate was 2.5%. Why would you doubt him?
21. Spot interest rates and yields (S3.3) Assume annual coupons.a. What is the formula for the value of a two-year, 5% bond in terms of spot rates?b. What is the formula for its value in terms of
22. Spot interest rates and yields (S3.3) A 6% six-year bond yields 12% and a 10% six-year bond yields 8%. Calculate the six-year spot rate. Assume annual coupon payments. (Hint: What would be your
23. Spot interest rates and yields (S3.3) Is the yield on high-coupon bonds more likely to be higher than that on low-coupon bonds when the term structure is upward-sloping or when it is
24. Spot interest rates and yields (S3.3) You have estimated spot rates as follows:r1 = 5.00%, r2 = 5.40%, r3 = 5.70%, r4 = 5.90%, r5 = 6.00%.a. What are the discount factors for each date (i.e., the
25. Spot interest rates and yields (S3.3) Look again at the bonds in part (b) of Problem 24.a. Explain intuitively why the yield to maturity on the 10% bond is less than that on the 5%bond.b. What
26. Measuring term structure (S3.3) The following table shows the prices of a sample of Narnian Treasury strips in December 2020. Each strip makes a single payment of $1,000 at maturity.a. Calculate
27. Term-structure theories (S3.4) The one-year spot interest rate is r1 = 5% and the two-year rate is r2 = 6%. If the expectations theory is correct, what is the expected one-year interest rate in
28. Term-structure theories (S3.4) Look again at the spot interest rates shown in Problem 24.What can you deduce about the one-year spot interest rate in three years if:a. The expectations theory of
rate is 5%.a. What is the expected real interest rate?b. If the expected rate of inflation suddenly rises to 7%, what does Fisher’s theory say about how the real interest rate will change? What
30. Nominal and real returns (S3.5) Suppose that you buy a two-year 8% bond at its face value.a. What will be your total nominal return over the two years if inflation is 3% in the first year and 5%
31. Bond ratings (S3.6) A bond’s credit rating provides a guide to its price. In December 2020, Aaa bonds yielded 1.29% and Baa bonds yielded 3.11%. If some bad news causes a 10% fiveyear bond to
32. Bond prices and yields (S3.1) Write a spreadsheet program to construct a series of bond tables that show the present value of a bond given the coupon rate, maturity, and yield to maturity. Assume
33. Duration (S3.2) The duration of a bond that makes an equal payment each year in perpetuity is (1 + yield)/yield. Prove it.
34. Price and spot interest rates (S3.3) Find the arbitrage opportunity(ies). Assume for simplicity that coupons are paid annually. In each case, the face value of the bond is $1,000.Bond Maturity

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