please check this case and answer two questions. these are finance questions

'2: Principles of Corporate Finance 12th edition Richard Brealeypdf , Adobe Acrobat Reader DC EH: WIN) EEKW) EWH) ii I; Principles of Corpo... .BEQ 733/977 x kQDGCQ116%vr'3a'IIZl'f\"| 9/ Rensselaer Advisers You are attempting to land a new client, Madison Mills, a conservative, long-established manufacturer of papermaking felt. Madison has established a_pension plan for its employees. RA would manage the pension assets that Madison has set aside to cover defined- benefit obluations for retired em-lo ees. or examp e, annua retirement income cou - equal 1 a o t e emp oyee 3 average sa ary in the five years prior to retirement. In a defined- benefit plan, retirement income does not depend on the performance of the pension assets. If the assets in the fund are not sufficient to cover pen- sion benefits, the company is required to contribute enough additional cash to cover the shortfall. Thus the PV of promised retirement benefits is a debt-equivalent obligation of the company. 35 Table 26 6 shows Madison 5 obligations to its already retired em lo ees from 2018 to 2036. Each ofthese em-lo ees receives a fixed dollar amount each month. ' ' ' ' Madison has set aside $90 million in pension assets to cover the obligations in Table 26.6, so this part of its pension plan is fully funded.36 The pension assets are now invested in a diversified portfolio of common stocks, corporate bonds, and notes. After reviewing Madison's existing portfolio, you schedule a meeting with Hendrik van Wie, Madison's CFO. Mr. van Wie stresses Madison's conservative management philosophy and warns against \"speculation.\" He complains about the performance of the previous manager of the pen- sion assets. He suggests that you propose a plan of investing in safe assets in a way that minimizes exposure to equity markets and changing interest rates. You promise to prepare an illustration of how this goal could be achieved. 35In dened contribulion plans, the corporation contributes to the pension fund on behalf of its employees. Each employee has a claim on part of the fund just as if the employee held shares in a mutual fund Employees' retirement benets depend on their balances in the fund at revilement If the benets fall short of an employee 5 plans or ex. cations he or she has no recourse to the com-an . \"Madison must also set pension assets aside for cunent employees. 1 ' '7 l . '7 " : l3 ed: PDF v '3 le PDF v '2' ma PDF A Adobe Acrobat Pro DC ea emanate PDF Xti$t l lg Document Cloud DKF' ERIK-t \"4;, l; E [m 18.44 E: 3m 7, 93 -; Principles of Corporate Finance WZth edition Richard Brealeypdf , Adobe Acrobat Reader DC _ X 32% i WIN) SUM) EWH) Elsi IE Principles ofCorpou. X (D Ziyue ' [EJBEQ 734/977 k 116% . EIEI'? (9/ Chapter 26 Managing Risk 705 n [D I}, @115. PDF v l] Year Date (t) Payment PV at 5\"/ PV X I , TABLE 26.6 | @ a Madison Mills Pension '3 0310;: PDF " 2018 1 10,020,000 9,542,857 9,542,857 Fund, projected benefits I: f A n. 2019 2 9,009,500 0,171,002 10,343,704 for retired employees. :1 E g PDF "o 2020 3 0,522,000 7,301,024 22,004,072 2021 4 0,434,500 0,939,004 27,750,330 Adobe Acrobat Pm DC em 2022 5 7,050,500 0,157,340 30,700,702 1 ,1 E ,, 5 2023 0 7,794,000 5,010,003 34,090,017 14:02:05: PDF la 59 74:00 ' 2024 7 7 729 500 5 493 211 30 452 479 , i 1 1 I 1 1 1 'I- / f 0.7K]: - 2025 0 7,039,500 5,170,714 41,305,714 ' 84 4 ask/s 0 2020 9 0,440,500 4,151,004 37,304,434 913 v 2027 10 0,330,000 3,000,071 30,000,709 2020 11 0,242,500 3,049,000 40,140,405 a EEWEE 2029 12 0,205,000 3,455,170 41,402,114 4 2030 13 5,775,500 3,002,071 39,017,322 > G.) Eglg 2031 14 5,000,700 2,020,734 39,002,277 2032 15 5,432,000 2,012,005 39,193,273 2033 10 5,140,000 2,354,093 37,075,092 2034 17 4,234,900 1,047,073 31,410,430 2035 10 4,123,000 1,713,192 30,037,450 2030 19 3,090,000 1,539,405 29,240,097 2037 20 3,500,000 1,319,339 20,300,700 2030 21 3,400,500 1,220,504 25,032,254 2039 22 3,340,000 1,141,904 25,123,041 SUM = 703,991 ,094 = 09,430,707 DURATION = 7'87 'g Document Cloud KF' -; Principles of Corporate Finance WZth edition Richard Brealeypdf , Adobe Acrobat Reader DC _ X 32% i WIN) SUM) EWH) Elsi IE Principles of Corpo... X (D Ziyue ' |_| . page (so k @999 . :3 new? 6/ ID Later you discover that RA has competition for Madison's investment management business. . SPX Associates is proposing a strategy of investing 70% of the portfolio ($63 million) in index B Efl PDF V I] funds tracking the US. stock market and 30% of the portfolio ($27 million) in US. Treasury secu- rities. SPX argues that their strategy is \"safe in the long run,\" because the US. stock market has a QUE PDF v @ delivered an average risk premium of about 7% per year. In addition, SPX argues that the growth in its stock market portfolio will far outstrip Madison's pension obligations. SPX also claims E g PDF A {50' that the $27 million invested in Treasuries will provide ample protection against short-term stock market volatility. Finally, SPX proposes to charge an investment management fee of only 20 basis points (20%). RA had planned to charge 30 basis points (30%). Adobe Acrobat Pro DC @D E " '= PDF " \\ as QUESTIONS itai'a a SJ 71'? 1. Prepare a memo for Mr. van Wie explaining how RA would invest to minimize both risk and i - 9 UK]: 0 exposure to changing interest rates. Give an example of a portfolio that would accomplish this ' 0"" objective. Explain how the portfolio would be managed as time passes and interest rates change. {1'5 $943214: v Also explain why SPX's proposal is not advisable for a conservative company like Madison. RA manages several fixed-income portfolios. For simplicity, you decide to propose a mix $ of the following three portfolios: a lling 4 . A portfolio of long-term Treasury bonds with an average duration of 14 years. b 6,) EvaE Part Eight Risk Management . A portfolio of Treasury notes with an average duration of 7 years. - A portfolio of short-term Treasury bills and notes with an average duration of 1 year. The term structure is flat. and the yield on all three portfolios is 5%. . Sorry, you lost. SPX won and implemented its proposed strategy. Now the recession of 2018 has knocked down US. stock prices by 20%. The value of the Madison portfolio, after paying nggag Document Cloud benefits for 2018, has fallen from $90 million to $78 million. At the same time interest rates KP have dropped from 5% to 4% as the Federal Reserve relaxes monetary policy to combat the gp recession. l":45 :: It: in] E: 201 7,912 -x Principles of Corporate Finance WZth edition Richard Brealeypdf , Adobe Acrobat Reader DC 32H: i WIN) EEKW) EWH) EE IE Principles of Corpo... X kQDGCD 116%. EIEI'? (5/ @BEQ @ 735/977 Part Eight Risk Management . A portfolio of Treasury notes with an average duration of 7 years. . A portfolio of short-term Treasury bills and notes with an average duration of 1 year. The term structure is flat, and the yield on all three portfolios is 5%. . Sorry, you lost. SPX won and implemented its proposed strategy. Now the recession of 2018 has knocked down US. stock prices by 20%. The value of the Madison portfolio, after paying benefits for 2018, has fallen from $90 million to $78 million. At the same time interest rates have dropped from 5% to 4% as the Federal Reserve relaxes monetary policy to combat the recession. Mr. van Wie calls again, chastened by the SPX experience, and he invites a new pro- posal to invest the pension assets in a way that minimizes exposure to the stock market and changing interest rates. Update your memo with a new example of how to accomplish Mr. van Wie's objectives. You can use the same portfolios and portfolio durations as in Question 1. You will have to recalculate the PV and duration of the pension benefits from 2019 onward. Assume a flat term structure with all interest rates at 4%. (Hint: Madison's pension obliga- tions are now underfunded. Nevertheless you can hedge interest rate risk if you increase the duration of the pension assets.) ea: PDF v QUE PDF v EDGE g PDF A Adobe Acrobat Pro DC $0 t'd' PDF til E'J 7MD l ere 9&5 saw: v a geese 6) EvaE Elg Document Cloud KP