Question
Urgent. Please do it ASAP. last two digits : 73 You are the manager of the company Link Ltd. and you are contemplating investing in
Urgent. Please do it ASAP. last two digits : 73
You are the manager of the company Link Ltd. and you are contemplating investing in a project, which will yield uncertain payoffs next year. In the good state the project will yield 1,000, whereas in the bad state it will yield only 500. The good state has 80%+x% probability, where x is the last digit of your student ID for example, if your student ID ends with 3, the good state has 83% probability and the bad state 20%-x% probability. Assume that the market is perfect and that investors are risk neutral. The opportunity cost of capital in this economy is 15%. Calculate the following, showing all relevant calculations.
(a) Calculate the price for this project, and its promised rate of return. (20%)
(b) Assume that you choose to partly finance this project by borrowing 500 today (i.e., by issuing a bond). The remaining money will be raised by issuing equity. Calculate the cash flows and returns to the levered equity holder in the good and bad state of the world. (45%)
(c) Assume company XYZ issues a bond that promises a one-year rate of return of 6%. One-year government bonds offer a rate of return of 4%. In no more than five lines, please explained whether the bond issued by XYZ is a good deal, assuming investors are risk neutral. (10%)
(d) A zero-coupon bond has maturity 20+y years where y is the last digit of your student ID. It costs 30,000 today and will repay 60,000. Calculate its YTM. (10%)
(e) The diagrams below depict the utility functions of 3 different investors, A B and C. Which of these investors is risk-averse? Explain your answer in no more than 5 lines
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