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Is the beta of a diversified portfolio less stable or more stable than the beta of a single security? Why?




Question 1. 10 points). Explain how each of the following affects corporate governance and whether the impact is positive or;negative.;a. Block ownership;b. Greenmail;c. Stock options as part of compensation;d. High level of debt;e. Board of Directors comprised by majority of outsiders and compensating based in part on performance of company..;Brigham 14e;Page 1 of 6;10/17/2014;A;B;C;D;E;F;1;2;3;4;5;6;Question 2. (20 points) ORNE 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 57.5% percent of the 1,000,000 shares of;7;common stock and wishes to maintain control of the company. The company's tax rate is 30 percent. Balance sheet information is shown below.;8;9;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;10 coupon, each $1,000 bond carrying 50 warrants to buy common stock at $15 per share.;11;12;13;14;15;16;Current Balance Sheet;17;Current Liabilities;$900,000;18;Common Stock, Par $1;1,000,000;19;Retained earnings;700,000;20 Total Assets;$2,600,000;Total claims;$2,600,000;21;22;23;24;25;26;27;a. Show the new balance sheet under both alternatives. For Alternatives 2, show the balance sheet after exercise of the warrants.;28;29;30;31;32;33;34;35;36;37;38;39;40;41;42;43;44;45;46;47;48;49;50;51;52;53;54;55;b. Calculate the president's ownership position for both alternatives. He doesn't buy any of the additional shares.;56;57;58;59;60;61;62;63 c. Calculate earnings per share for both alternatives, assuming that EBIT is 10 percent of total assets.;64;65;66;67;68;69;70;71;72;73 d. Calculate the debt ratio under both alternatives;74;75;76;77;78;79;80;81 e. Which alternative do you recommend and why?;82;83;84;85;86;87;88;89;90;Brigham 14e;Page 2 of 6;10/17/2014;A;B;C;D;E;F;1;2;3;4;5;6;7;8;9;10;11;12;13;14;15;16;17;18;19;20;21;22;23;24;25;26;27;28;29;30;31;32;33;34;35;36;37;38;39;40;41;42;43;44;45;46;47;48;49;50;51;52;Question 3. (20 points) Company X wants to acquire another similar company. It estimates that net cash flows for the acquired company will;be $4,500,000 per year for 10 years. The cost is $30,000,000. The company's cost of capital is 10 percent.;a. Calculate NPV, IRR, and MIRR.;b. Should the company go ahead with the project based on your calculations? Why or why not?;c. Identify 3 factors that might change your decision.;Brigham 14e;Page 3 of 6;10/17/2014;A;B;C;D;E;F;G;1;2;3;4;5;6;7;Question 4. (20 points) The Aleander Company plans to issue $10,000,000 of 10-year bonds at par next June, with semiannual interest payments. The;8;company's current cost of debt is 10 percent. However, the firm's financial manager is concerned that interest rates will increase in coming months;9;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;10 futures contract is $100,000);11;12;Delivery;13;Month;Settlement;14;(1);(5);15;Dec;102-17;16;Mar;101-01;17;June;100-12;18;19;20;21;22;23;24;25;26;27 a. Calculate the present value of the corporate bonds if rates increase by 2 percentage points.;28;29;30;31;32;33;34;35;36;37;b. Calculate the gain or loss on the corporate bond position.;38;39;40;41;42;43;44;45;46;47;48;49;50;51;52;53;54;55;c. Calculate the number of contracts required to cover the bond position. Then calculate the current value of the futures position.;56;57;58;m financing at the higher interest rate.;59;60;61;62;63;64;65;66;67;68 d. Calculate the implied interest rate based on the current value of the futures position.;69;70;71;72;73;74;75;76;77;78;79;80;81;82;83;84;85;86;87;88;89;90;e. Interest rates increase as expected, by 2 percentage points. Calculate the present value of the futures position based on the rate calculated above;91;plus the 2 points.;92;93;94;95;96;97;98;99;f. Calculate the gain or loss on the futures position.;100;101;102;103;104;105;106;g. Calculate the overall net gain or loss.;107;108;109;110;111;112;113;114;115;116;117;118;119;h. Is this problem an example of a perfect hedge or a cross hedge? Is it an example of speculation or hedging? Why?;Brigham 14e;Page 4 of 6;10/17/2014;A;B;C;D;E;1;2;3;4;5;6;7;8;9;10;11;12;13;14;15;16;17;18;19;20;21;22;23;24;25;26;27;28;29;30;31;32;33;34;35;36;37;38;39;40;41;42;43;44;45;46;47;48;49;50;51;52;53;54;55;56;57;58;59;60;61;62;Question 5. (20 points) Pierre Imports will be liquidated. Its current balance sheet is shown below. Current assets are sold for;$600,000 and fixed assets are sold for $1,000,000. All fixed assets are pledged as collateral for all mortgage bonds. Subordinated;debentures are subordinate only to notes payable. Trustee costs are $100,000.;Balance Sheet Before Default;Current Assets;Net fixed assets;1,200,000;1,800,000;Total assets;3,000,000;Accounts payable;Accrued taxes;Accrued wages;Notes payable;Total current liabilities;First-mortgage bonds;Second-mortgage bonds;Debentures;Subordinated debentures;Common stock;Retained earnings;Total claims;400,000;80,000;60,000;60,000;600,000;900,000;400,000;500,000;300,000;200,000;100,000;3,000,000;a. How much will SHs receive?;b. How much will mortgage bondholders receive?;c. How much will priority creditors receive?;d. Identify the remaining general creditors. How much will each receive before subordination adjustment and after adjustment?;Brigham 14e;Page 5 of 6;10/17/2014;A;B;C;D;E;F;G;1;2;3;4;5;6;7;8;9;10;11;12;13;14;15;16;17;18;19;20;21;22;23;24;25;26;27;28;29;30;31;32;33;34;35;36;37;38;39;40;Question 6. (10 points) The standard deviation of stock returns for Stock A is 30%. The standard deviation of the market return;is 20% and the correlation between Stock A and the market is 0.75.;a. Calculate Stock A's beta.;b. In a bull market with rapidly increasing stock prices, will Stock A likely outperform or underperform the average stock?;Why?;c. Is the beta of a diversified portfolio less stable or more stable than the beta of a single security? Why?;Brigham 14e;Page 6 of 6


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