Solutions to Final Exam - Seminar in Corporate Finance | FIN 5360, Exams of Finance

Download Solutions to Final Exam - Seminar in Corporate Finance | FIN 5360 and more Exams Finance in PDF only on Docsity! Key to Final; Finance 5360; Summer 2008 Note: For all problems requiring calculations, you will only earn points for setting up solutions. You will not earn any points for solving anything. “Setting up solutions” means writing down the appropriate equation or equations and plugging in as many numbers as possible. For later steps in multi-step problems, you can plug in unsolved variables...variables you have set up to solve but have not actually solved. Example: X = (2 + 3)3.5; Y = X/7.31. Short Answer (15 points each) 1. Calculate the amount ($) of bBay stock you would need to buy if you want to invest $500,000 in a value-weighted portfolio of the following four stocks. Firm Outstanding Shares Stock Price bBay 400,000 $20 Watchvia 200,000 $30 Crysis Motors 100,000 $5 Waste Recycle 300,000 $10          10000,3005000,10030000,20020000,400 20000,400 000,500Investment 2. Assume you invest $450,000 in a Transportation ETF with a beta of 1.3 and $150,000 in a AAA Bond ETF with a beta of 0.2. Calculate the beta of your portfolio. 2.0 000,150000,450 000,150 3.1 000,150000,450 000,450               P 3. In a perfect market, how does the firm’s weighted average cost of capital change as the firm increases its leverage? No change 4. NewsyCorp currently funds its assets worth (market value) $1 million with equity that has a beta of 0.75. Calculate the beta of NewsyCorp’s stock if it were to issue $250,000 of risk-free debt and use the proceeds to repurchase stock. Assume perfect capital markets. 75.0 000,250000,000,1 000,250 75.0        E 5. What key issue will cause managers and stockholders to disagree about whether a firm should invest in projects with small negative net present values that diversify the firm? Stockholders are well diversified while managers are not 6. Will a firm’s debt holders want the firm to pay more or less dividends than the firm’s stockholders would prefer? Less Key to Final; Finance 5360; Summer 2008 7. A bond by Excess Company matures in two years for $15 million. What type of short or long position in options and in risk-free bonds will provide the same payoff as this bond issued by Excess? Calculate the payoff on the option portion of your portfolio if the value of firm equals $10 million when the debt matures. Buy risk-free bond that matures in two years and create short put with strike of $15 million that expires in two years Payoff = –max(15 – 10,0) = – 5 8. Assume you have just bought calls on Liberty Holdings that expire one year from today and that have a strike price of $50. The price of the calls when you bought them was $10. Sketch a graph of your profit as function of Liberty’s stock price a year from today if you borrow the money to buy the calls at an interest rate of 5%. -20.00 -10.00 0.00 10.00 20.00 30.00 40.00 50.00 0 10 20 30 40 50 60 70 80 90 100 Stock Price When Call Expires P ro fi t 9. Given the following information, calculate the beta of TJX’s debt Beta of TJX’s assets = 0.85 Market value of: TJX’s assets = $800 million, TJX’s equity = $600 million If the Black-Scholes Options Pricing model is used to value TJX’s equity: d1 = 1.80, N(d1) = .964, d2 = 0.79, N(d2) = .786    85. 600800 800 964.1        D 10. If you wanted to use the Black-Scholes Option Pricing Model to determine the value today of being able to expand a project later, what would you use for K? Cost to expand