This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: Tma A Salwhlm ActSc 371 Midterm Test 2 This examination contains 5 WA questions with 56 points in total (No multiple choice questions this time) Instruction:
Aids: nonprogrammable Calculator The last page is the formula sheet Answer all questions in the space provided. Your rationale is as important as your ﬁnal answer ID#: Last Name: First Name: 1. [10 pts] Wintendo Co. wants to issue new 20year bonds for developing a new game system. The company currently has 8% coupon bonds with face amount $1,000 on the market that sell for $1,148.77. These bonds make
semiannual coupons and mature in 10 years. a) [4 pts] Show that the YTM is 6% on the existing bonds p/lUUUXGQO/O/ol \[ 114891;} :‘ 40Qm37ﬁ+ Wm) 0‘03)?” A? K Lox) 111 W] a, VM»%/
C M reunitigp . , ll \l/TM “fJY Semiavlhvxékj air/pm 1300513 \ ‘~ 5m Oxnml tile 11w mtg. '3 ”7 l”. .
b) [6 pts] What coupon rate should the company set on its new bonds if it wants them to sell 21% Brieﬂy
explain why. "P LOU/PG“ Vat—Q : TTM ) flue/m FﬂC/Q/ [y‘é LOW/i : an/ alibi/”11¢ . (”0W1m 111‘ @517. to 19...; an at 1”“ :> D 2. [12 pts] You are given the following information on Elmira Pizza Inc. Assume the present time is t=0.
° Earnings are currently $5.5 millions There are 1 million outstanding shares It has no growth plan for now The dividend payout ratio is 100%; The dividends will be paid out at t=l,2,3... The required return on its stock is AER 12% a) [4 pts] Determine the current (that is, at t=0) stock price based on the given information 5%» : 56M” M 1%.! 00
1 f Mfg : W5; :E
l0 he! Mimi; 0,/2/ 4?.0035 b) [8 pts] Now suppose that the company proposes an expansion project. The project proposes to open two new
pizza stores for the next two years (that is, a new store will be opened at F1 and 2, respectively). In order to fund
new stores, 60% of the company's earnings will be retained for the next two years. Each store will earn 40% on its
initial investment at each yearend f0 years. The company will change its dividend payout ratio back to 100%
from time t:3. Compute the new stoc 'price based on this proposal. 3. [14 pts] Consider the following two projects. Use a discount rate of 7% for the unit time interval in both projects.
HINT: a§l7% : 4.1002.
Time Project A Project B
0 100 55
I 40 20
2 40 20
3 40 20
4 40 20
5 40 20 a) [4 pts] Determine which one should you choose based on the NPV.
NW<A> f ._ i559 jm [15.0 X {2%.}7) t": g4} t.) ()f
MMB) =2 tr 7‘ W “a 3W2, 2:“ e boo % 5(leth % ave/”B b) [4 pts] Determine which one you should choose based on the payback time period rule based on the linear
interpolation. t 39 ”my 4?
Ac: ”i D vgg/
t; Q ””20 ’1?
t9} +20 +§ c) [6 pts] Let us denote the IRR of Project A to be X%. Show (or prove) that 25% < X < 30%. Note for part (c):
* You may use a graph but should clearly explain the graph and your rationale
* No points will be given ifthe answer is obtained by your ﬁnancial calculator's builtin IRR function WWMMW yaw
MMBWM aw 4. [8 pts] An asset is in CCA 10% class with a purchase price 0f$1,000. Compute:
a)[4 pts] the CCA amount in the Wyear 5365” b)[4 pts] the PV of the CCA tax shield assuming 5% interest rate, a resale price of 500 at the end of year 3, and a
corporate tax rate of 40%. RVWW Wee/i" ; [my 7 /b 7 X “77 (Jr 0.52452» mm {§®//m)%/°2X¢°Z I WWW“ m»— ”we X " 57 + /07» [+52 37 +77 7,555 ; DULCUD} )4 oﬁaéij? W @3133} xi— hot; ~ 169.723?% ,,. (IX, PM”?! 2149433”! 5. [12 pts] This question concerns the single period binomial option pricing model. The riskfree rate is 10%. Stock price Option payoff 100 / 120 ‘7 / O
\ 90 ' \ 20 tZO t=1 tZO Fl 21) [4 pts] Using the risk neutral probability, compute the current price of the put option. E0, Swing/w)
Zx/Qo + (/7?) 90 (+0.! lac 2 CO“ L/3m+éﬁm: ébhoé/ i./ b) [gpts] Compute the delta of the option l4 c)[0 pts] Assume that the actual (physical) probability of stock going up is 30%. Compute the risk premium that the
investors demand on this option. E<Q> 0.3¥0+0\¥X>®
\ ,7 _ __,_ M
PM; mi brim (MM lief ~ m [4+9
1. in,”
th8 D 6 Mil ,‘fiww M) ding/agave J Formula sheet Note: No further explanation will be given for these formulas at the examinations. Student should know what each variable stands for. Sustainable growth rate (Covered in Ch.3)
PC1—@U+E—)
:T— Ml—d)(1+E) Alternative formulas for sustainable growth rate (Covered in Ch.3) If ROE is deﬁned as the ratio of the current year’s net income to the previous year’s equity
9 : ROE x (1 — d)
If ROE is deﬁned as the ratio of the current year’s net income to the current year’s equity ROE x (1 —d) ng—ROExﬂ—d) Growing annuity (Covered in Ch. 5) 1 —91" n " C(l 1 m(..) =:—— =0 ——1
(1+r))t r—g i=1 Growing Perpetuity with differential growth (Covered in Ch. 5 and 6) Assuming 91 for the ﬁrst 71 payments and 92 thereafter, n
1— (1_+9_1) 71—1 1
PV—C 1+7‘ + (1+g1) (1—1—92) ><
r—m T—gz um” PV CCA Tax Shield (Covered in Ch.8) CdTC 1+0.5k 1nin(O,S)dTC 1 PVC TS~
CA k+dx 1+k k+d Xn+kw BlackScholes formula for a call option (Covered in Ch. 23)
c=SxNMﬂ—E€”waﬂ
d1=1n(S/E)+(r + ”72)T
aVT
d2 2 d1 ~ (Ix/T 1O ...
View
Full Document
 Winter '08
 Wood

Click to edit the document details