Lecture 4 (CHAPTER 13)
Answers to Concepts Review and Critical Thinking Questions
1.
No. The cost of capital depends on the risk of the project, not the source of the money.
2.
Interest expense is tax-deductible. There is no difference between pretax and
Lecture 6
Leverage & Capital
Structure: Basic
Concepts
1
Preamble
Cathay Pacific (293.HK) plans to
raise $10 million for a major
expansion.
Due to the firms risk, the equity
investors will require a 12% rate
of return, and hence its cost of
equity capital
FIN 3004 Corporate Finance
Lecture 5
Dividend Policy
1
Learning Outcomes
Understand dividend types and
how they are paid
Understand the issues
surrounding dividend policy
decisions
Understand why share repurchases
are an alternative to dividends
Understan
Chapter 30 l‘inuncia! Distress 97]
Questlons and Problems
1. Chapter 7 When the Beacon Computer Company tiled for bankruptcy under
f- (T: ISLE
Chapter 7 ol‘ the U.S. bankruptcy code. it had the Following balance Shem
iltibrntation:
BASIC
(Questions I—2)
FIN3004 Corporate Finance
Group Presentation Questions 2015-2016 Semester 2
Question 1
Goblet Inc. has excess cash of $10,000 and other assets of $55,000. Equity is worth
$65,000. There are 5000 shares outstanding and earnings for the year are $8,000. The
Kan Ho Yin Alex s126850 FIN3004 Assignment4
6a) the market value of Steinbergs equity: assume discount rate = 13%
S(Steinberg) = [0.8(2,700,000-900,000) + 0.2(1,100,000-900,000)] / 1.13
= $1,309,734.513
The market value of Steinbergs debt:
B(Steinberg) =
Kan Ho Yin Alex s126850 FIN3004 Assignment 10
4. Z-Score Jon Fulkerson has also received a credit application from Seether, LLC, a
private company. An abbreviated portion of the financial information provided by the
company is shown below:
Total assets $6
Kan Ho Yin Alex s126850 FIN3004 assignment 9
7. Convertible Bond Value Sportime Fitness Center, Inc., issued convertible bonds
with a conversion price of $51. The bonds are available for immediate conversion.
The current price of the company s common stoc
Kan Ho Yin Alex s126850 FIN3004 assignment 8
3. Rights Stone Shoe Co. has concluded that additional equity financing will be
needed to expand operations and that the needed funds will be best obtained
through a rights offering. It has correctly determined
14. Lease or Buy Wolfson Corporation has decided to purchase a new machine that
costs $3.2 million. The machine will be depreciated on a straight-line basis and will be
worthless after four years. The corporate tax rate is 35 percent. The Sur Bank has
off
Kan Ho Yin Alex s126850 Assignment2 FIN3004
13a) Dividend per share = $4,000/800 shares = $5
After: Px = $46 - $5 = $41 per share
If repurchase: Shares repurchased = $4000/$46 = 89.96shares
If repurchase, shareholder will have $46per share, if keep shares
Net Exposure
Net exposure = (FX assets FX liabilities) + (FX bought FX sold)
Net exposure of V.P:
($90 - $50)/1.0074 = + $ 39.7
Analysis of Exchange Rate Exposure
Because the net exposure of V.P is positive, he is in Net Long position.
He may worry about
FIN3003 Assignment 5
Requirement: Dont provide answers alone without showing your work.
Consider the following options portfolio: You write a January 2012 expiration call option
on IBM with exercise price $170. You also write a January expiration IBM put
FIN3003 Assignment 5
Suggested Answers
a.
Position
ST<165
165 ST170
ST>170
Short call
0
0
(ST 170)
Short put
(165 ST)
0
0
ST 165
0
170 ST
Total
Payoff
165
170
Write put
ST
Write call
b. Proceeds from writing options (from Figure 15.1):
Call
= $8.93
Put
FIN3003 Assignment 4
Requirement: Dont provide answers alone without showing your work.
1. A 6% coupon bond paying interest annually has a modified duration of 10 years, sells
for $800, and is priced at a yield to maturity of 8%. If the YTM increases to 9
FIN3003 Assignment 1
Requirement: Dont provide answers alone without showing your work.
1. You manage an equity fund with an expected risk premium of 14% and a standard
deviation of 54%. The rate on Treasury bills is 6.8%. Your client chooses to invest
$1
FIN3003 Assignment 2
Requirement: Dont provide answers alone without showing your work.
Suppose that many stocks are traded in the market and that it is possible to borrow at
the risk-free rate, rf. The characteristics of two of the stocks are as follows:
FIN3003 Assignment 3
Requirement: Dont provide answers alone without showing your work.
For Problems below, assume the risk-free rate is 4% and the expected rate of return on
the market is 15%.
1. A share of stock is now selling for $70. It will pay a div
FIN3003 Assignment 2
Suggested Answers
14. Since Stock A and Stock B are perfectly negatively correlated, a risk-free
portfolio can be created and the rate of return for this portfolio in equilibrium will
always be the risk-free rate. To find the proporti
FIN3003 Assignment 3
Suggested Answers
21. Since the stock's beta is equal to 1.0, its expected rate of return should be equal to
that of the market, that is, 15%.
E(r) =
D P1 P0
P0
0.15 =
8 P 70
1
P1 = $72.5
70
22. If beta is zero, the cash flow should b
1. The 1% VaR will be less than 30%. As percentile or probability of a return declines so
does the magnitude of that return. Thus, a 1 percentile probability will produce a
smaller VaR than a 5 percentile probability.
1
X(1+0.12) =
2
3
4
5
FIN3003 Lecture 9
Suggested Answers for Supplementary Exercises
5.
a. The required margin is 1,164.50 $250 .12 = $34,935.00
b. Total Return = (1,210 1,164.50) $250 = $11,375
Percentage Return = $11,375/$34,935.00 = .3256 = 32.56%
c. Total Loss = [1,164.50
FIN3003 Lecture 6
Suggested Answers for Supplementary Exercises
3. a. False. According to CAPM, when beta is zero, the excess return should be zero.
b. False. CAPM implies that the investor will only require risk premium for systematic
risk. Investors are
FIN3003 Lecture 5
Suggested Answers for Supplementary Exercises
1. So long as the correlation coefficient is below 1.0, the portfolio will benefit from
diversification because returns on component securities will not move in perfect
lockstep. The portfoli
FIN3003 Lecture 3
Suggested Answers for Supplementary Exercises
12.
a. In principle, potential losses are unbounded, growing directly with
increases in the price of IBM.
b. If the price of IBM shares goes above $178, then the stop-buy order would
be execu