Finance 2 (Math Problem Sample)
Part II – Quantitative Problems (10 points each) Show your work for partial credit. Showing the calculator steps is fine. 1a. Beck Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond’s price? 1b. Beck Corporation’s noncallable bonds currently sell for $1,165. They have a 15 -year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity? 1c. Beck Corporation’s bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC)? 2a. Suppose you believe that Delva Corporation's stock price is going to decline from its current level of $82.50 sometime during the next 5 months. For $510.25 you could buy a 5-month put option giving you the right to sell 100 shares at a price of $85 per share. If you bought this option for $510.25 and Delva's stock price actually dropped to $60, what would your pre-tax net profit be? Cost basis: $510.25 Total gain: $2,500 [100 shares x ($85-$60)] Total pre-tax net profit: (Total gain-Cost basis) ($2,500-$510.25) Total pre-tax net profit: $1,989.75 2b. Suppose you believe that Delva Coorporation's stock price is going to increase from its current level of $22.50 sometime during the next 5 months. For $310.25 you can buy a 5-month call option giving you the right to buy 100 shares at a price of $25 per share. If you buy this option for $310.25 and Delva's stock price actually rises to $45, what would your pre-tax net profit be 3. Exhibit 3 (The following data apply to the problem(s) below.) Oklahoma Instruments (OI) is considering a project called F-200 that has an up-front cost of $250,000. The project's subsequent cash flows are critically dependent on whether another of its products, F-100, becomes an industry standard. There is a 50% chance that the F-100 will become the industry standard, in which case the F-200's expected cash flows will be $110,000 at the end of each of the next 5 years. There is a 50% chance that the F-100 will not become the industry standard, in which case the F-200's expected cash flows will be $25,000 at the end of each of the next 5 years. Assume that the cost of capital is 12%. a. Refer to Exhibit 3. Based on the above information, what is the F-200's expected net present value? Show your work for partial credit! b. Refer to Exhibit 3. Now assume that one year from now OI will know if the F-100 has become the industry standard. Also assume that after receiving the cash flows at t = 1, OI has the option to abandon the project, in which case it will receive an additional $100,000 at t = 1 but no cash flows after t = 1. Assuming that the cost of capital remains at 12%, what is the estimated value of the abandonment option? Show your work for partial credit! 4. Jarman Industries is interested in performing two independent projects. Project A has an initial investment of $65,000, and has a useful life of 5 years. Cash flows are expected to be $20,000 each year. Project B has an initial investment of $70,000 and has a useful life of 5 years. Cash flows are expected to be $18,000, $24,000, $19,000, $26,000 and $25,000. The firm’s cost of capital is 10%. What is each project’s NPV. What is each project’s IRR? 5. The firm of Chris Melanie has two investment proposals that have been submitted to you for consideration. Given the following data, for each project calculate the required information and make a recommendation. (10 points) Proposal Jackson Proposal Harley P Return (%) P Return (%) .25 10 .25 5 .45 14 .55 10 .30 18 .20 13 a. expected return J __________ H ____________ b. standard deviation J __________ H____________ c. coefficient of variation J __________ H ___________ Recommendation: 6. Kathy purchased ratchets rotator one year ago for $6,500. During the year it generated $4,000 in cash flow. If Kathy sells the rotator, she could receive $6,100. What is the rate of return on the sale of the ratchets rotator? (6 points) 7.Which asset would the risk-averse financial manager prefer? Why? ____________________________________________________________________ Asset A B C D ___________________________________________________________________ Initial investment $15,000 $15,000 $15,000 $15,000 Annual rate of return Pessimistic 8% 5% 3% 11% Most likely 12% 12% 12% 12% Optimistic 14% 13% 15% 14%source..
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