Q1
Name_Adam Oliver_____________________________________
Final Examination
FINC 5880
Session 9
Question XXXXXXXXXXpoints). Explain how each of the following affects corporate governance and whether the impact is positive or negative.
a. Block ownership
Block ownership impacts corporate governance by givig a large block of company's shares to an individual or an institution. Block owners can have great amounts of influence over managerial decision making in a company because of their high amount of shareholder voting power. Any form of blockholder with a high stake in a company will generally monitor the company's management and is usually active in critical company decisions. This impact could be either positive or negative. On one hand, there is another voice that could
ing a good perspective, but on the other hand the block owner could have a negative influence on the company because there is such a high amount of decision making power that rests with a single investor.
. Greenmail
Greenmail is when a financial institution or individual buys enough shares in a company to threaten a hostile takeover so that the target company will instead repurchase it's shares at a premium. A company will generally respond defensively to greenmail in order to prevent a hostile takeover. By buying back their own shares, a company will reduce their risk for takeover, but this is generally viewed as an unfavorable option as there are other things that most companies would prefer to do with their capital.
c. Stock options as part of compensation
These are forms of compensation paid to employees (generally upper management) as part of their payment packages. This type of compensation generally vests over a period of time, and ensures that those in management do their best to increase the stock price of a company. If the stock goes up, the employee stock options become worth more. This is definitely a positive impact on a company, because it motivates employees to work in a way that drive share price higher.
d. High level of debt
With both corporate and personal finance, it can be difficult to justify high levels of debt. If the amount of debt that a company ca
ies is high, it could give power to their creditors and allow those creditors to have decision rights over a company. A creditor is generally only going to allow safe investments and projects because they want to ensure that the company is able to pay back their debt. This is a risk the creditor has taken and they will always act out of their own self interest and attempt to make sure that the company is swayed in a direction that allows them to be paid back above all else. This is an unfavorable situation to be in for any company.
e. Board of Directors comprised by majority of outsiders and compensation based in part on performance of company.
This will have a positive impact because outsiders are generally going to be much more independent than someone who has a large financial interest in the company. This type of governance helps to promote impartial decision making, and board member compensation can be tied to stock price (like a stock option) to ensure that the best decisions possible are made on behalf of the company.
Q2
Name______________________________________
Final Examination
FINC 5880
Session 9
Cu
ent Balance Sheet
Cu
ent Liabilities $900,000
Common Stock, Par $0.25 1,000,000
Retained earnings 700,000
Total Assets $2,600,000 Total claims $2,600,000
Alternative 1: Common stock $10 FACTS Alternative 1: Common stock
# new shares 200,000 Tax rate 20% # new shares
Par value per share $0.25 New financing $2,000,000 Par value per share
Existing Loan $600,000
Alternative 2: Debentures Interest rate 10% Alternative 2: Debentures
Exercise price per wa
ant $15 Interest amount - old $60,000 Exercise price per wa
ant
# bonds to raise new capital 2,000 Interest amount - new $200,000 # bonds to raise 2M
# new shares 100,000 # new shares
wa
ants per bond 50 President owns 51.5% wa
ants per bond
New money raised 1,500,000 Shares outstanding 4,000,000 New money raised
Addition to par 25,000 Addition to pa
Additional paid-in capital 1,475,000 Additional paid-in capital
d. Calculate the debt ratio under both alternatives
e. Which alternative do you recommend and why?
Question XXXXXXXXXXpoints) Reuth Corporation plans to raise $2 million to pay off its existing short-term bank loan of $600,000 and to increase total assets by $1,400,000. The bank loan bears an interest rate of 10 percent. The company's president owns 51.5% percent of the 4,000,000 shares of common stock and wishes to maintain control of the company. The company's tax rate is 20 percent. Balance sheet information is shown below.
The company is considering two alternatives to raise the $2 million: (1) sell common stock at $10 per share, or (2) Sell bonds at a 10 percent coupon, each $1,000 bond ca
ying 50 wa
ants to buy common stock at $15 per share.
a. Show the new balance sheet under both alternatives. For Alternatives 2, show the balance sheet after exercise of the wa
ants.
c. Calculate earnings per share for both alternatives, assuming that EBIT is 11% of total assets.
. Calculate the president's ownership position for both alternatives. He doesn't buy any of the additional shares.
Q3
Name______________________________________
Final Examination
FINC 5880
Session 9
Unlevered cost of equity 11%
Growth rate after Year 3 4% Year 1 Year 2 Year 3
Free Cash Flow 450 750 805
a. Calculate the expected free cash flow for Year 4. What might cause the free cash flow to be lower?
b. Calculate the horizon value of the unlevered operations.
c. Calculate the total value of unlevered operations at Year 0.
Question XXXXXXXXXXpoints). Talcon Corporation has a 11% unlevered cost of equity. The company forecasts the free cash flows shown below. The cash flows are expected to grow at a constant rate of 4% rate after Year 3.
Q4
Name______________________________________
Final Examination
FINC 5880
Session 9
Futures Prices: Treasury Bonds--$100,000; Pts. 32nds of 100%
Delivery Month Open High Low Settle Change Open Interest
(1) (2) (3) (4) (5) (6) (7)
Dec 103'14 103'14 102'11 102'17 -6 678,000
Mar 102'11 102'23 100'28 101'01 -5 135,855
June 101'14 101'26 99'32 99'08 -5 17,255
b.
a. (1) Calculate the implied yield on the futures contract?
(2) How many futures contracts will be needed to hedge potential losses in bond proceeds (based on cu
ent market conditions) due to waiting (round up to the nearest integer)?
(3) Calculate the total value of the hedge position.
. Interest rates in general increase by 200 basis points The bond's terms don't change and that the coupon rate is still 10%.
(1) Calculate the amount of proceeds be given the new market rates?
(2) Calculate the loss in proceeds based on the original target for proceeds??
c. Assume that the company had entered the hedge found in part a.
(1) Calculate the new price of the hedge position?
(2) Calculate the gain on the hedge?
(3) Calculate the net effect of the loss of proceeds and the gain on the hedge?
d. Is this problem an example of a perfect hedge or a cross hedge? Is it an example of speculation or hedging? Why?
Question XXXXXXXXXXpoints) The Aleander Company plans to issue $10,000,000 of 10-year bonds at par next June, with semiannual interest payments. The company's cu
ent cost of debt is 10 percent. However, the firm's financial manager is concerned that interest rates will increase in coming months, and has decided to take a short position in U. S. government t-bond futures. See the settlement data below for t-bond futures. (Note: One standard futures contract is $100,000)
Q5
Name______________________________________
Final Examination
FINC 5880
Session 9
Sale of cu
ent assets 2,100,000
Sale of fixed assets 5,000,000
Trustee costs 500,000
Before Before
Default Balance Sheet Default
Cu
ent Assets 3,000,000 Accounts payable 465,000
Net fixed assets 7,600,000 Accrued taxes 80,000
Accrued wages 95,000
Notes payable 60,000
Total cu
ent liabilities 700,000
First-mortgage bonds 2,000,000
Second-mortgage bonds 3,500,000
Subordinated debentures 4,500,000
Common stock 200,000
Retained earnings (300,000)
Total assets 10,600,000 Total claims 10,600,000
a. How much will SHs receive?
b. How much will mortgage bondholders receive?
c. How much will priority creditors receive?
Question XXXXXXXXXXpoints) Pontrain Imports will be liquidated. Its cu
ent balance sheet is shown below. Cu
ent assets are sold for $2,100,000 and fixed assets are sold for $5,000,000. All fixed assets are pledged as collateral for all mortgage bonds. Subordinated debentures are subordinate only to notes payable. Trustee costs are $500,000.
d. Identify the remaining general creditors. How much will each receive before subordination adjustment and after adjustment?
Q6
Name______________________________________
Final Examination
FINC 5880
Session 9
Stock A: expected return 12%
Stock A: standard deviation 40%
Stock B: expected return 14%
Stock B: standard deviation 60%
Co
elation between A and B 0.35
Stock A beta 0.90
Stock B beta 1.20
% portfolio in Stock A 45%
% portfolio in Stock B 55%
a. Calculate the expected return of the portfolio.
Expected Return 13.100%
b. Calculate the standard deviation of the portfolio.
Standard Deviation 42.76%
c. Calculate the beta of the portfolio
Beta 1.0650
d. Does the portfolio have more risk, less risk, or the same risk as the market? Explain.
The portfolio has more risk than the market. The market beta would normally be 1, and the portfolio has a greater beta than 1, meaning the risk is higher.
e. Will your portfolio likely outperform, underperform, or perform the same as the market in a period when stocks are rapidly falling in value? Why?
If t he stock market is rapidly falling, our portfolio and it's higher beta, mean that it will be more volatile than the overall market and as such it will fall more in a rapid market deterioration scenario.
Question XXXXXXXXXXpoints) A portfolio consists of Stock Aand Stock B. Data for the 2 stocks is shown below.