Two years ago, an investor invested her available cash 10,000 in bonds of company chess. These bonds were issued at par and have a face value of 1,000 per bond. Right now , these bonds, have a remaining maturity of 4 years, an annual coupon rate of 3% , they are trading at 104.76% and have a volatility of 3.77%. The risk-free rate is 2% and the expected market return is 8%. However, since company Chess has also issued stock, a BBA student that took the Corporate Finance course told her that she could create a portfolio with the same standard deviation as the bond but with a higher expected return. The correlations and the standard deviations for Chess stocks, bonds and market are presented in the table below.

Correlation / Chess (stock) / Chess (bonds) / Market / Stdev

Chess (stock) / 1 / / x / / x / /15%/

Chess (bonds) -0.1/ / 1 / / x / /3.77%/

Market / 0.8 / /-0.2/ /1/ /20%/

Note: as the table got destroyed I added the bars and the xs to represent empty cells. For example: for the Chess Stocl there is 1 correlation with the Chess Stock, none with the chess bond or the market and a stdev of 15%.

a) What is the expected return for the Chess stocks and bonds?

b) Show that the BBA student is right, and provide detailed calculation to support this.

c) Why could it be interesting to buy both stocks and bonds from the same firm in the framework of Modigliani-Miller without taxes. In other words, what does the investor want to achieve with this strategy?

d) Chess announces following expected numbers for the next 3 years ( in thounds ):

2018 2019 2020

EBITDA 8,000 6,000 10,000

Depreciation 2,000 2,500 3,000

The firm has a tax rate of 30% and 1 million shares. Her completely consists of bonds with a total face value of 40 million. The payout ratio is 50% in 2018 and she wants to pay the same dividend in 2019 (and the years afterwards) she wants to decrease the payout ratio to 24%. The book value of the equity in the beginning of 2018 is 50 million. What is the value of the share of Chess in the beginning of 2018 based on the dividend discount model?

e) What is the present value of the growth opportunities (PVGO) in the beginning of 2020? f) Is Chess stick a growth stock or a value stock (show your calculation). How could this affect the firms discount rate?