Corporate Financial Management
Corporate Financial Management FIN 4360
Popular in Course
Popular in Finance
This 2 page Class Notes was uploaded by Johathan Hodkiewicz IV on Saturday October 3, 2015. The Class Notes belongs to FIN 4360 at Baylor University taught by Staff in Fall. Since its upload, it has received 42 views. For similar materials see /class/217905/fin-4360-baylor-university in Finance at Baylor University.
Reviews for Corporate Financial Management
Report this Material
What is Karma?
Karma is the currency of StudySoup.
Date Created: 10/03/15
Finance 4360 Final Spring 2008 900 Class Name Note For all problems requiring calculations you will only earn points for setting up solutions You will not earn any points for calculating or solving anything Setting up solutions means writing down the appropriate equation or equations and plugging in as many numbers as possible For later steps in multistep problems you can plug in unsolved variablesvariables you have set up to solve but have not actually solved Example x 2 33 5 Y X731 1 Given the following returns for Barnes amp Noble BKS and the Standard amp Poor s 500 SampP500 calculate the volatility and beta of Barnes amp Noble Return on M SampP500 1 23 18 2 40 13 3 13 11 4 50 6 5 1 14 2 Explain how debt in a firm s capital structure creates potential con icts between the firm s stockholders and its creditors Note In your discussion you should identify the potential conflicts 3 Baltic Enterprises pays no dividends and has a current stock price of 14 In each of the next two years Baltic s stock will either go up by 3 or down by 250 The oneyear riskfree interest rate is 5 per year and is expected to remain unchanged Using the Binomial Model calculate the price of a twoyear call option on Baltic with a strike price of 15 4 You are considering buying two call contracts on Blockbuster Inc with a strike price of 750 per share that expire ten months from today You are considering this purchase because while you expect Blockbuster s stock price to fall from its current 670 per share to 5 per share by 2 months from today you expect its price to rise to 9 per share by 7 months from today Seven months from today you plan to close out your position You expect the standard deviation of returns on Blockbuster stock to equal 62 and the standard deviation of returns on the calls to equal 191 The return on Treasuries depends on maturity as follows 2months 501 7 months 499 10months 487 What cash flow can you expect today as you buy the call contracts Note use a to represent an in ow and a to represent an outflow 5 Assume that the market value of Universal Gaming s stock is 600 million and that the market value of its debt is 400 million Assume also that the beta of on Universal s stock is 12 and that the beta of Universal s bonds is 03 Finally assume perfect capital markets and that the debt beta does not change with the firm s leverage a Assume that Universal issues 400 million of stock and will use the proceeds to retire their debt What will be the beta of Universal s stock b Assume instead that Universal issues 250 million of additional debt and will use the proceeds to repurchase stock If the beta of Universal s debt rises to 04 what will the beta of Universal s stock after the change c Are stockholders better off in a or b Finance 4360 Final Spring 2008 900 Class 6 Because current production exceeds normal capacity at their existing facilities Proctor Gambler Inc is considering building an additional manufacturing site in Dallas Since the new facility will use new quality control techniques Gambler estimates that production costs will be far more predictable than in the past As a result the standard deviation of returns on the new site will be 29 which is lower than the 35 standard deviation of returns on a new facility Gambler just finished building in Wisconsin and also lower than the 40 standard deviation of returns on the firm s other existing facilities The beta of the new facility will be 11 compared to the 12 beta of the Wisconsin facility and the 14 beta of Gambler s other existing facilities The new facility will be built on land that was purchased a year ago for 750000 that could be sold today for an aftertax cash flow of 650000 The new facility will require an investment of 3 million today and 2 million three months from today Six months from today the new facility will generate an initial net aftertax cash flow of 13000 After this initial cash flow net monthly cash flows from the new facility will grow by 05 per month and will continue through 5 years from today when the facility will be closed Should Gambler build the new factory if the riskfree rate is 45 and the market risk premium is 75 7 Assume that Next Sprinter Inc s current stock price is 32 per share Assume also that a call on Next Sprinter with a strike price of 35 has a current market price of 2 At current interest rates the present value of this strike price is 3479 Finally assume that an identical put same strike price and expiration on Next Sprinter has a current market price of 6 Note in answering all parts use a for inflows and a for outflows a Given this information what set of transactions today will generate an arbitrage profit What is your profit today from these transactions b Show that the conditions of arbitrage are met if Next Sprinter s stock price has fallen to 29 when the options exp1re c Show that the conditions of arbitrage are met if Next Sprinter s stock price has risen to 40 when the options exp1re 8 You are planning to invest 300000 in a portfolio of RedRock and BlackStone Of the total 200000 will come from the proceeds of selling your lawn business and 100000 will come from borrowing at a 4 interest rate The expected return on RedRock is 9 while the expected return on BlackStone is 15 The volatility of RedRock is 19 while the volatility of BlackStone is 29 The correlation between BlackStone and RedRock is 02 Note combine your answers to a and b on the same graph but clearly label what part of the graph answers a and what part of the graph answers part b a Sketch a reasonable set of efficient portfolios that you might construct from RedRock and BlackStone if you are willing to hold short and long positions in the stocks b Given the assumptions identify the specific portfolio that gives you the highest return for the risk you will ace