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FINC5880 Week 9 Final Examination




Question;Question 1. (15 points) Kern Corporation entered into an agreement with its investment banker tosell 10 million shares of the company's stock with Kern netting $210 million dollars from theoffering. The expected price to the public was $25 per share.The out-of-pocket expenses incurred by the investment banker were $2,000,000.a. What profit or loss would the investment banker incur if the issue were sold to the public at anaverage price of $25 per share?b. What profit or loss would the investment banker incur if the issue were sold to the public atan average price of $20 per share?c. Is the agreement between the company and its investment banker an example of anegotiated or a best-efforts deal? Why? Which is riskier to the company? Why?Page 1 of 605/17/2013A12345678910111213141516171819BCDEFGFinal ExaminationFINC 5880Week 9Question 2. (20 points) Tundra Corporation is interested in acquiring Tantrell Corporation. Tantrell has 2 million sharesoutstanding and a target capital structure consisting of 40 percent debt. The debt interest rate is 8 percent. Assume that therisk-free rate of interest is 3 percent and the market risk premium is 7 percent.Tantrell's free cash flow (FCF0) is $3 million per year and is expected to grow at a constant rate of 6 percent a year, its beta is1.2. Tantrell has $5 million in debt. The tax rate for both companies is 30 percent.20 a. Calculate the required rate of return on equity using equation: r s= rRF + RPM(b)21222324252627 b. Calculate weighted average cost of capital, using equation: WACC = W drd(1-%) + wsrs282930313233343536373839 c. Calculate the value of operations, using equation: V ops = FCF0(1+g)/WACC - g)404142434445 d. Calculate the value of the company's equity, using equation: Vs = Vops - debt46474849505152 e. Calculate the current value of the company's stock, using equation:53Price per share = Vs/shares outstandingPage 2 of 605/17/2013ABCD23456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960616263646566676869707172737475767778798081828384858687888990919293949596979899100101102103EFinal ExaminationFINC 5880Week 91Question 3. (20 points) Corizon Company's balance sheet and income statement are shown below (in millions of dollars).Corizon and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the $5 preferred will beexchanged for one share of $2.00 preferred with a par value of $50 plus one 10 percent subordinated income debenture with apar value of $50. The $8 preferred issue will be retired with cash. The company's tax rate is 30 percent.Current AssetsNet fixed assetsTotal assetsCurrent175.0183.0358.0Current liabilitiesAdvance payments$5 preferred stock, $100 par value (1,000,000) shares$8 preferred stock, no par, callable at 100 (80,000 shares)Common stock, $1.00 par value (5,000,000) sharesRetained earningsTotal claimsCurrent150.010.0100. StatementNet salesOperating expenseNet operating incomeOther incomeEBTTaxesNet incomeDividends on $5 PSDividends on $8 PSIncome to Common SHsCurrent600.0550. Construct the pro forma balance sheet after reorganization takes place. Show the new preferred at its par value.b. Construct the pro forma income statement after reorganization takes place. How does the recapitalization affect net incomeavailable to common stockholders?c.What are the required pre-tax earnings before and after the recapitalization?d. Calculate the debt ratio before and after the reorganization?e. Would the common stockholders be in favor of the reorganization? Why or why not?Page 3 of 605/17/2013A123BCDEFGHFinal ExaminationFINC 5880Week 9456Question 4. (15 points) A Treasury bond futures contract settles at 95-8.78a. Calculate the present value of the futures contract?91011121314151617 b. Are current market interest rates higher or lower than the standardized rate on a futures contract? Explain.18192021222324252627282930 c. Calculate the implied annual interest rate on the futures contract31323334353637383940414243 d. Calculate the new value of the futures contract if interest rates decrease by 1 percentage point44 annually.45464748495051e. Why do companies enter into futures contracts? Provide a specific example.525354Page 4 of 605/17/2013Final ExaminationFINC 5880Week 9Question 5. (15 points) Your portfolio is diversified. It has an expected return of 10.0% and abeta of 1.10. You want to add 200 shares of Tundra Corporation at $30 a share to your portfolio.Tundra has an expected return of 14.0% and a beta of 1.50. The total value of the investor'scurrent portfolio is $18,000.a. Calculate the expected return on the portfolio after the purchase of the Tundra stock?b. Calculate the expected beta on the portfolio after you add the new stock?c. Is your portfolio less risky or more risky than average? Explain.d. Will your portfolio likely outperform or underperform the market in a period whenstocks are rapidly falling in value?e. Is beta always an accurate predictor of a portfolio's performance? Explain?Page 5 of 605/17/2013Final ExaminationFINC 5880Week 9Question 6. (15 points) Marcal Corporation is considering foreign direct investment in Asia. The company estimates that the projectwould require an initial investment of $14 million. and generate positive cash flows of $2 million a year at the end of each of the next20 years. The project's cost of capital is 12%.a. Calculate the project's NPV.b. The company thinks there is a 50-50 chance that the Asian country will impose restrictions on the company in one year. If therestrictions are imposed, cash flows will be $1,000,000 per year for 20 years. If restrictions are not imposed, cash flows will be$3,000,000 per year for 20 years. In either case, the cost will remain at $14,000,000. If the company waits one year, what is the project'sNPV with restrictions and without restrictions.c. Calculate the value of the option if the company waits one year. Should the company wait or go ahead with the project now?d. Discuss 2-3 factors other than the value of the real option that the company should consider in making its decision.


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