Arundel Partner

The questions in this sample exam atomic number 18 mostly quantitative, exclusively you should also expect some qualitative ones, such(prenominal) as true/false questions, on the exam. I did not overwhelm any here, as each true/false ordain make a diffe require reasoning than others. Question 1 Consider a project with the following risk-free cash flows t = 0t = 1t = 2 -40 20 25 think over that one family zero-coupon bonds yield 6% and dickens family zero-coupon bonds yield 8%. 1a) get down the NPV of the project. 20/(1+6%)+25/(1+8%)2-40=0. 3014 1b) Describe the tracking portfolio for this project. FV=25 and 20 c) Describe how you could brook the project to make arbitrage profits at t = 0 (i. e. , a sure cash inflow at t = 0 without any future obligation). Please be explicit about what assets you would indue in, how much each would cost at t=0, and what each would pay at t=1 or t=2. (Hint You go out sop up to consider investing in the project and a portfolio at the af oresaid(prenominal) time). Short sell bond by 40. 3014, 18. 8679 and 21. 4335 1d) Suppose direct that preferably of the zero coupon bonds expound above, on that point argon both risk-free bonds in the mart (Bond A and Bond B) that can be described as follows )Bond A pays a $10 coupon at t=1 and matures at t=2 when the bondholders testament bump $110. Today (i. e. , at t=0) the grocery store determine of the bond is Ba = $104. 743. b)Bond B pays a $20 coupon at t=1 and also matures at t=2 when the bondholders will ascertain $95. Its price today is Bb=$ coulomb. 790. Calculate the NPV of project X. (Hint Note that the interest order in the deliverance may have intensifyd. To solve this question, you will contend to form a tracking portfolio of the project). Question 2 A passel is suitable for either six or nine condominium units.Assume attempt free lay is 10% Per unit spin costs (now or succeeding(prenominal) course of study) $100,000 for building with six units $110,000 for building with nine units Assume that construction does not get rid of any time i. e. , if we decide to build (either now or next region), we can do so and sell the condos at a time Current price of each unit is $140,000 Per course rental rate is $10,000 per unit (to be received at the end of the year) Next year, if market conditions are Favorable, condos sell for $186,000 Unfavorable, condos sell for $116,000 a) Suppose we decide to build this year and sell immediately. Should we build six or nine units? What is the appreciate of the cluster given that we build this year? 6*(140-100)=240 9*(140-110)=360 build 9 units 2b) Suppose we decide to wait and make the construction decision next year. Calculate the value of the lot now. 2c) Suppose that as in snap off a, we decide to build today, but we do not sell immediately. Instead, we rent out the condos for a year, and sell them next year. How does the value of the lot change relative to your closure in part a?Please answer without doing any calculations. Question 3 A gold mine will produce all of its output two years from now. The mine has a reserve of 100 pounds of gold. The gold can be extracted at no cost and sold in year 2. We have the following entropy The two-year forward price of gold is $10,000 per pound today. In year 2, gold price will be either $14,000 per pound, or $8,000 per pound. The yearly risk-free rate is 10%. The risk-free rate will wait at 10% next year too. 3c) Now suppose that there is some uncertainty about the reserves of the mine.The mines reserves are either 100 pounds or zero, with each outcome every bit likely. In year 1, we will learn whether the reserves are 100 pounds or zero. We receive an offer today for the mine that is conditional on the reserves. The bidder offers $1. 1 million if reserves prove to be 100 pounds, but only $55,000 if the reserve turns out to be zero. The offer is valid for two years. In either case, the payment is to be received in year 2 if the offer is accepted. What is the value of the mine today? Question 4 A diversified steady consists of two divisions, industrial equipment and beer roduction. A year from now, the industrial equipment division will produce either $150 if the economy is in expansion, or $50 if the economy is in a recession. The beer division will make $30 if the economy is in expansion, but $ clxx if the economy is in recession. Each state of the economy is equally likely. The buckram has peachy bonds with face value $120 to be repaid a year from now, and 100 outstanding shares. Assume that the risk-free rate is zero, all investors are risk-neutral, there are no taxes, and no bankruptcy costs. a) What is the ongoing market value of the debt? What is the current share price? 4b) Now suppose that the unbendable decides to sell the beer division, and pay the proceeds to its shareholders as a dividend. How much will the beer division sell for? Immediately afterward this decision is an nounced, but in the lead the actual sale and the dividend takes place, what is the market value of the bonds? What is the per share price? 4c) Suppose now that rather than directly selling the beer division, the firm spins it off.Specifically, for each outstanding share of the original company, one new share representing an ownership learn in the freshly created beer firm is issued and is given to shareholders. The new beer company assumes half(prenominal) of the face value of the outstanding debt. After the spin-off, the original shares keep craft (now representing a claim only on the industrial equipment business), while the newly issued beer shares start trading separately. Immediately after this spin-off takes place, what is the market value of the debt of the industrial equipments firm?What is the market value of the debt of the beer production firm? What are the per share prices of each company? 4d) Show that the Modigliani-Miller Proposition holds, i. e. , that the total firm value is independent of the capital structure decisions of the firm in part a, b, and c. Question 5 Hollifield Inc. has a current market value of $10,000,000, which is sedate of $3,000,000 perpetual risk-free debt and $7,000,000 faithfulness with 500,000 shares outstanding. Hollifield plans to announce that it will issue an special $2,000,000 of perpetual bonds (also risk-free) and use these funds to repurchase equity.The bonds will have a 6-percent coupon rate, which is the risk-free rate. After the sale of the bonds and the share repurchase, Hollifield will claim the new capital structure indefinitely. The corporate tax rate for Hollifield is 40% and there are no personal taxes. 5a) What will the stock price be immediately after Hollifield announces its plan to issue bonds and repurchase equity? What will the total market value of the firms equity be immediately after Hollifield announces its plan to issue bonds and repurchase equity? 5b) How many shares will Hollifield repurchase?What will be the market value of Hollifields equity after the new bond is issued and the shares are repurchased? 5c) Suppose that after the firm announces its purport to recapitalize but before the pricing and the issuance of the new bond take place, unexpectedly, the president announces that corporate taxation will be immediately removed. Find the effect on the stock price and on the price of the current debt right after the presidents announcement is made. (Note Assume that remotion of taxes is permanent and has no other effects on the firms investment policy or in the economy). &8212&8212&8212&8212&8212&8212&8212 pic