I need help with questions 9 and 10 in the attached file.
BBOA3010 Corporate Finance - assignment 2014 Answer all questions. 1. Assume the 1-year spot rate is 4%, the 2-year spot rate is 4.8% and the 3-year spot rate is 5.5%. What is the price of a 3-year 8% coupon bond with annual interest payments? 2. An investor buys a 3-year 15% coupon bond with a YTM of 5%. Coupons are paid annually and the bond has a par value of NOK 100. The next coupon payment is exactly one year from now. All coupons received are reinvested at the prevailing YTM. Following the purchase of the bond the YTM in the market changes to 10% and stays that way until the investor sells after 18 months. What is the holding period return (expressed on an annual basis)? 3. Use the information below. Assume that today is 09 September, 2014. Datastream Bonds 09/09/14 EIDSIVA ENERGI 2009 5.61% 17/03/16 EIEN05 Country Code Market Default Price Clean Price Gross Price NW NW Datastream Code Borrower Code NK 105.1300 c) NK 105.1300 a) NK 107.8812 Date of Last Price Changes Settlement Date First Interest Accrual Date Days Accrued Interest Accrued Interest A/365 10/12/12 12/09/14 17/03/09 b) 179 2.7512 Redemption Yield Interest Yield Japanese Simple Yield Life Duration Mod. Duration Convexity Spread/yield curve GVUS Spread/benchmark NA 2.1115 d) 5.3362 2.1038 1.5096 1.4581 1.4280 3.4376 1.7408 NA -1M -3M Price(%chng) 0.00 0.00 Red.Yield(%chng) -7.46 -18.49 Duration 1.54 1.71 Mod. Duration 1.51 1.67 S & P Rating Moody's Rating -12M 0.00 -38.51 2.36 2.28 NA NA 5999EQ BC6Z4 ISIN NO0010497928 Local NA Type of Bond Type of Guarantee Amortisation Coupon Pay Dates Coupon Issue Date First Redemption Date Last Redemption Date Amt Issued (000's) Amt Outstanding (000's) 3.00 10.24 FI UL BL 17/03 5.6100 17/03/2009 17/03/2016 17/03/2016 500K 500K 106 2.50 2.00 1.50 104 S O N D J F MA M J J A S SPREAD OVER YIELD CURVE DEFAULT PRICE(R.H.SCALE) Source: Thomson Reuters Datastream a) What is the (gross) price of the bond on 9 September 2014? (hint: since the next settlement date is on 12 September, the bond price on 9 September should reflect the value of the bond on the settlement date. Note that the settlement date falls between two coupon dates.) b) Since 9 September 2014 is between two coupon dates, the current bondholder has held the bond for a certain number of days since the last coupon was paid. Thus, the proportion of the next coupon payment that is accrued to the current bondholder (i.e., the accrued interest) should be deducted from the (gross) price. How many days has the current bondholder held the bond since the last coupon payments (i.e., what is the 'Days Accrued Interest')? In other words, how many days have elapsed between the last coupon date and the next Settlement Date? c) What is the clean price of the bond? (note: clean price = gross price - accrued interest). d) Interest yield can be calculated as the coupon payment divided by the clean price. What is the interest yield on the bond? e) If the YTM (a.k.a. redemption yield) changes by 1%, by how much will the bond price expected to change? 1 of 4 BBOA3010 Corporate Finance - assignment 2014 4. Compare the bond in Question 3 above with the one below. Which bond is expected to have a higher price volatility? Give two reasons. Datastream Bonds 09/09/14 11.17 BKK AS 2013 4.15% 11/04/23 BKK22 Country Code Market NW NW Default Price Clean Price Gross Price Datastream Code Borrower Code NK 104.4660 NK 104.4660 NK 106.2169 Date of Last Price Changes Settlement Date First Interest Accrual Date Days Accrued Interest Accrued Interest A/365 08/09/14 12/09/14 11/04/13 154 1.7509 Redemption Yield Interest Yield Japanese Simple Yield Life Duration Mod. Duration Convexity Spread/yield curve GVUS Spread/benchmark NA 3.5349 3.9726 3.4742 8.5781 7.3039 7.0545 56.5803 1.1426 NA 8581YE BCHXV ISIN NO0010674989 Local NA Type of Bond Type of Guarantee Amortisation FI UL BL Coupon Pay Dates Coupon Issue Date First Redemption Date Last Redemption Date Amt Issued (000's) Amt Outstanding (000's) 11/04 4.1500 11/04/2013 11/04/2023 11/04/2023 1M 1M 2.20 106 2.00 104 1.80 102 1.60 100 -1M Price(%chng) 0.20 Red.Yield(%chng) -0.91 Duration 7.38 Mod. Duration 7.13 -3M 2.43 -8.85 7.54 7.26 S & P Rating Moody's Rating 1.40 -12M 7.01 -20.70 7.94 7.60 98 1.20 1.00 96 S O N D J F MA M J J A S SPREAD OVER YIELD CURVE DEFAULT PRICE(R.H.SCALE) Source: Thomson Reuters Datastream NA NA 5. Use the information below. DATAST REAM EQUITIES Mnemonic - @AAPL Local Code - U03783310 Current Price 12 Mth Range 09/09/14 11.43 APPLE Geography Code - US Exchange - Nasdaq 98.3600 High 103.3000 Low 64.3028 08/09/14 2/ 9/14 16/ 9/13 Industry Group - COMPH Sector - TECHD Fin.Yr LocStd I/B/E/S 09/13 06/14 09/14 09/15 5.68 6.21 6.33 7.05 17.3 15.8a) 15.5 14.0 78.2% 13.59 (%=Rel to DS Index) EPS PE Price Change 1mth 3mth 12mth PE Rel. (U$) 3.8% 5.0% 36.0% P/Cash (NK) 5.4% 11.2% 42.9% Relative to S&PCOMP Dividend Rate (U$) 1.88 F 0.2% 2.3% 13.6% Dividend Yield 1.91 b) Dividend Cover 3.3 Market Value (U$) 588966.3M Div Last Fin Year 1.63 Adjusted to (NK) 3724551M Last Div Paid QTR(U$) 0.47 Tax- G Pay Date 14/08/14 XD Date 07/08/14 P rice and Index (rebased) 100 (U$) 9/11 9/12 9/13 50 0 00 0102 0304 05 0607 08 0910 1112 APPLE S&P 500 COMPOSITE (PI) Total sales Pre-T ax Prof. Publ. EPS Cash EPS Mkt to Bk Val ROE (%) 109B 157B 171B 34205M 55763M 50155M 3.95 6.31 5.68 4.85 7.73 7.24 4.89 5.29 3.55 41.67 42.84 30.64 No. Shares in Issue 5987865(000s) Volume 46356.7(000s) Percentage of free float 95% Volatility 6 Beta 0.775 Correlation 0.401 Source: Thomson Reuters Datastream 2 of 4 BBOA3010 Corporate Finance - assignment 2014 a) What is the PE of the company based on i) last year earnings, and ii) forecasted earnings? b) What is the dividend yield based on the forecasted dividend? c) At a market risk premium of 5% and risk-free rate of 2%, what is the expected return on the share according to CAPM? d) What was the dividend payout ratio last financial year? e) What is the expected dividend payout ratio this financial year? 6. The market consensus is that Shushine has an ROE = 9%, has a beta of 1.25, and plans to maintain indefinitely its traditional plowback ratio of 2/3. This year's earnings were NOK3 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 14%, and risk-free securities currently offer a 6% return. a) At which price Shusine stock should sell? b) What is the P/E ratio? c) What is the present value of growth opportunities? d) Suppose an investor is convinced that Shusine will announce that it will immediately reduce its plowback ratio to 1/3. What will be the value of the stock to the investor? The market is still unaware of the decision. Explain why the value of the stock no longer equals the price. 7. Company Dynamo has just paid a dividend of 1 per share. The dividend is expected to grow at a rate of 20% per year for the next 3 years, and then to level off to 5% per year forever. An appropriate market capitalization rate is 15%. a) What is the present value of the horizon value of the share? b) What should be the price of the share? c) If the share is traded in the market at the price calculated in b) above, what is the dividend yield based on the dividend expected at the end of Year1? 8. Yadayada is considering four projects which have either two- or three- year lives. The company has raised all its capital in the form of equity and has never borrowed. This is partly due to the company culture against borrowing. Shareholders in the company regard the company as relatively risky, given its existing portfolio of projects. Other firms' shares in this risk class have generally given a return of 16% per annum and this is taken as the opportunity cost of capital for the investment projects. The risk level for the proposed projects is the same as that of the existing range of activities. Net cash flows Project Year 0 Year 1 Year 2 Year 3 A -5,266 2,500 2,500 2,500 B -8,000 0 0 10,000 C -2,100 200 2,900 0 D -1,975 1,600 800 0 Ignore taxation and inflation. a) Use IRR to determine which of the four projects to proceed with, if there are no limitations on the number of projects that can be undertaken. b) Which is the best project if they are mutually exclusive, using IRR? c) Rank the projects using NPV rule. Explain why, under conditions of mutual exclusivity, the selected project differs from that under b). d) Explain why the NPV approach may be considered a better measure than IRR. 3 of 4 BBOA3010 Corporate Finance - assignment 2014 9. Pine & Oak have spent 20,000 researching the prospects for a new range of products. If it were decided that production is to go ahead an investment of 240,000 in capital equipment will be required. The accounts department has produced budgeted profit and loss statements for each of the next five years for the project. At the end of Year 5 the capital equipment will be sold and production will cease. The capital equipment is expected to be sold for scrap at the end of Year 5 for 40,000. Projected Profit/loss (in 000s) Year 1 Sales 400 Materials 240 Other variable costs 40 Overheads 20 Depreciation 40 Net profit/(loss) 60 Year 2 400 240 40 20 40 60 Year 3 400 240 40 24 40 56 Year 4 320 192 32 24 40 32 Year 5 200 120 20 24 40 (4) When production start it will be necessary to raise material stock levels by 30,000 and other working capital by 20,000. Both the additional stock and other working capital increases will be released at the end of the project. Customers receive one year's credit from the company. The overhead figures in the budgeted accounts have two elements - 60% is due to a reallocation of existing overheads, 40% is directly incurred because of the take-up of the project. For the purposes of this appraisal, regard all receipts and payments as occurring at the end of the year to which they relate. The company's cost of capital is 12%. Ignore inflation or tax. Appraise the project using NPV approach. Should the company go ahead? Why or why not? 10. Bash'n has an ageing piece of equipment which is less efficient than more modern equivalents. This equipment will continue to operate for another 15 years but operating and maintenance costs will be NOK35,000 per year. Alternatively, it could be sold, raising NOK20,000 now and replace with its modern equivalent which costs NOK 70,000 but has reduced operating and maintenance costs at NOK 30,000 per year. This machine could be sold at the end of its 15-year life for scrap for NOK 5,000. The third possibility is to spend NOK 25,000 for an immediate overhaul of the old machine which will improve its efficiency for the rest of its life, so that operating and maintenance costs become NOK 32,000 per annum. The old machine will have a zero scrap value in 15 years, whether or not it is overhauled. Bash'n requires a return of 9% on projects in this risk class. What is the best course of action? Assume that cash flows arise at the year ends. ************END*************** FAQs: Q: When is the deadline? A: Before 15:00 on Monday 13 October, 2014. Q: Where to hand in the assignment? A: At Servicesenter on the 3rd floor. Q: Is it a group or an individual assignment? A: Individual submission but may work in group. Q: Is this part of the assessment for the course? A: Yes, the assignment needs to be accepted in order to be eligible to sit for the exam. ************END*************** 4 of 4
