1. Company Amliba.Inc is considering building a second headquarter in a new city. The new office will create 5000 new jobs for the city. So the government is incentized to support the project. The company plans to issue $100 million bond with coupon rate of 8%. Coupon will be paid annually and the bond matures in 5 year. As a form of support, local government guarantee the bond, so the YTM of the bond at issuance is 5%. Another bond with exactly the same features but without governament guarantee is currently trading at a price that generate a YTM of 10%. Calculate the value of the government guarantee to the firm. (Ignore taxes.)
2. A bond has a face value of $1,000, an annual coupon rate of 5 percent, yield to maturity of 10 percent, and 10 years to maturity. Calculate the bond’s duration.
3. ABC Corporation expects to pay a dividend of $2 per share next year, and the dividend payout ratio is 80 percent. Dividends are expected to grow at a constant rate of 8 percent forever. Suppose the company’s equity beta is 1.21, the market risk premius is 9%, and the risk free rate is 5%. Calculate the present value of growth opportunities.
4. A project requires an initial investment of $300,000 and expects to produce an after-tax operating cash flow of $150,000 per year for three years. The asset value will be depreciated using straight-line depreciation over three years. At the end of the project, the asset could be sold for a price of $100,000. Assume a 21% tax rate and 15% cost of capital. Calculate the NPV of the project.
5. Two machines, A and B, which perform the same functions, have the following costs and lives.
| Type | Initial cost | Annual maintainence cost | Life | |||
| A | 6200 | 500 | 5 | |||
| B | 6700 | 650 | 7 | |||
| The two machines are mutually exclusive and the cost of capital is 10 percent. | ||||||
| Which machine would you choose? | ||||||
6.
| There are two assets in one portfolio, X and Y. The weight for Asset X is 48%. | ||||
| Asset X has a 50-50 chance of earning a return of 10% or 20%. | ||||
| Asset Y’s expected return is 23% and the standard deviation is 33%. | ||||
| Assume the correlation coefficient between X and Y is 0.53. | ||||
| Calcualte the expected return of the portfolio. | ||||
| Calculate the standard deviation of the portfolio return. | ||||
| 7 | A toy company is considering a project to produce scotters for young kids. The most likely outcomes for the project are as follows: | ||||||||||||||
| Expected sales: 42,000 units per year | |||||||||||||||
| Unit price: $65 | |||||||||||||||
| Variable cost: $35 per unit | |||||||||||||||
| Fixed cost: $600,000 per year | |||||||||||||||
| The project will last for 10 years and requires an initial investment of $0.8 million, which will be depreciated straight-line over the project life to a final value of zero and there is no salvage value. | |||||||||||||||
| The firm’s tax rate is 21%, and the required rate of return is 10%. | |||||||||||||||
| However, you recognize that some of these estimates are subject to error. | |||||||||||||||
| Number of unit sold could fall 25% below expectations for the life of the project and, if that happens, the unit price would probably be only $55. | |||||||||||||||
| The good news is that fixed costs could be as low as $500,000, and variable costs would decline in proportion to sales. | |||||||||||||||
| a. | What is project NPV if all variables are as expected? | ||||||||||||||
| b. | What is NPV in the worst-case scenario? | ||||||||||||||
| c. | Suppose every variable turns out to be as expected, except the variable cost. | ||||||||||||||
| What is the percentage change in variable cost that make this project break-even? | |||||||||||||||
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