midterm 2 cribsheet

midterm 2 cribsheet - Company stock is selling for $80 and...

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∙Company stock is selling for $80 and risk free is 6%. Convertible bond w a conversion price $100, FV of $1000, coupon rate 8%, 10 yr to maturity. Similar bond w/o conversion have yield of 7%. Convertible bond sells for $1100. -Conversion ratio = 1000/100 = 10 -Conversion premium = 100/80 -1=.25 -Conversion value = $80 x 10 = $800 -Straight Bond value. n=10 r=7 fv=1000 pmt=1000x.08 pv=?=$1070.23 -Value of conversion opt = 1100 - 1070.23 ∙Stock A has expected return of 8% and std dev of 12%. Stock B expec ret 10% and std dev 15%. Correlation .3. 60% invested in A and 40% in B. Rf 5% -Er = .6x8 + .4x10= 8.8% -Variant Rp = (.6² x 12²)+(.4² x 15²) + (2 x .3 x .6 x .4 x 12 x 15) -Std dev =√variant =10.7% -Sharpe ratio = (8.8 - 5) / 10.7= .355 ∙Preferred stock pays quarterly dividend of $2.30. Sells for $92, what is req ret for holding stock? -R = (2.3 / 92) x 4 = 10% ∙Asset worth $35 or $60 in 1 year. Current price is $40. Risk free rate 5%. Call option w strike price $50. -Possible payoffs for option= 10 or 0 -construct risk free portfolio using only options and underlying asset. (10-0) / (60-35) = .4 Buy .4 shares, write 1 option -PV of portfolio: hi: (60x.4) -10= $14 lo: (35x.4)-0= $14 PV= 14 / 1.05 = $13.33 -Value of option = (.4 x $40) –c= $13.33 C= $2.67 Beta 2.5 and residuals 1.1 -Risk premium of 8% and riskfree 5% What is risk premium of stock and Er? RiskP = 2.5 x 8 = 20% Er =.05 + .2 = 25% -Market goes up 1% next month, what is expected change in stock? 5/12 + 2.5(1- 5/12) = 1.875% -stock actually goes up 2% what is idio. Risk? 2-1.875= .125% -Std dev of ret is 1.5. What are syst risk, idio risk, total risk? Sys=1.5x2.5=3.75% Idio= 1.1 (residuals) Total =√1.1² + 3.75² = 3.91% -What range expect mnt ret to fall in 95% of the time? 25/12 +- 2(3.91) = [-5.732 , 9.899] -Given $1000, how to construct a portfolio w B=2. What is annual Er? 2 = 2.5w + (1-w)0 W=.8 $800 stock and $200 riskfree Er= (2x8) + 5= 21% Company wants to start project. 4 yrs and initial start of $50,000 depric str line to 0 over 4 yrs. No salvage value. Ann. Costs expected to be $10k per year.Tax 35% d rate 12% -OCF required ea yr to break even at end? (NPV=0) N=4 pv=-50k r=12 fv=0 pmt=?=16,461.72 -Min. bid that should be offered? OCF=(bid-cost) x .65 +depr x .35 Bid=(ocf+costs x .65-depr x.35)/.65 =(16,461.72+6500-4375) / .65 = $28594.95 Comp. consider prjt w initial cost $120k. depric over 5 yr strt line. Proj end after 4 yrs and assets have salvage value of $15k. Ann. Costs are $30k, sales $50k. Proj require $20k in NWC that will be recovered at end. Tax 35%. Cpt CF for ea yr. -depr = 120k/5= 24k -ocf =(sales-cost) x (1-t) + depr x T = (50k-30k)x.65 + 24k x .35 = 13k + 8400 = 21.4k -atsv= btsv x(1-t) + endBV x T =15k x .65 + 24k x .35 = 9750 + 8400 = 18,150 Yr 0 1 2 3 4 ocf 0 21.4k 21.4k 21.4k 21.4k ∆nwc -20k 0 0 0 20k ncs -120k 0 0 0 18.15k ttl -140k 21.4k 21.4k 21.4k 59.55k consider these CF Yr 0 1 2 3 4 5 CF -20k 4k 5k 6k 4k 4k Discount rate= 12%
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midterm 2 cribsheet - Company stock is selling for $80 and...

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