1. Refer to the following information:
Stock| E(r)| | Correlation Coefficients|
1| 0.06| 0.20| 1 with 2: -0.10|
2| 0.08| 0.10| 1 with 3: +0.60|
3| 0.15| 0.15| 2 with 3: +0.05|

A portfolio is formed as follows: sell short $1,000 of Stock 1; buy $1,500 of Stock 2; buy $1,500 of Stock 3. The investor uses $1,000 of his own equity, with the remaining amount borrowed at a risk-free interest rate of 4% (with continuous compounding). (a) Assuming that there are no restrictions on the use of short-sale proceeds, what is this investors expected rate of return? (b) What are some of the issues associated with short-selling, and what impact could these issues have on the expected return calculated in part (a).

ANSWER
(a) w1 = -1; w2 = 1.5; w3 = 1.5; wr = -1
E(r) = -1*0.06 + 1.5*0.08 + 1.5*0.15 + (-1)*0.04 = 24.5%
(b) short selling is restricted; unable to use proceeds from the short sale; fee for short selling reduces return. All of these restrictions could fundamentally change the return to the portfolio.

2. Consider a European call option on a stock. The stock price is $70, the time to maturity is 12 months, the risk free rate of interest is 10% per annum (with continuous compounding), the exercise price is $65, and the volatility is 32%. A dividend of $1 is expected in six months time. Determine the price of the option using the binomial method with 6-month steps.

ANSWER

3. The current price of silver is $9 per ounce. The storage costs are $0.24 per ounce per year payable quarterly in advance. Assuming that interest rates are 10% per annum for all maturities, calculate the futures price of silver for delivery in nine months. （所有的FORWARD 和FUTURE 都用CONTINEOUS COMPONDING 算R） ANSWER

还有一种解法—练习本上
4. The current price of a stock is $20 and over the next three months it is expected to move up to $22 or down to $19. If the continuously compounded three month risk free rate is 4.5%, what is the price of a three...

...Final Exam Practice Problems
1. Firm ABC’s only outstanding debt is $100,000 worth of coupon bond (market value). Its yield to maturity is 8%. Given that its tax rate is 40%, what is its effective cost of debt?
Effective cost of debt = cost of debt * (1-tax rate) =8%*(1-40%)=4.8%
2. Firm ABC has a stock currently traded at $20. The next year’s dividend will be $0.20. The dividend growth rate is forecasted to be 6% forever. Risk-free rate is 3%, and market risk premium is 4%. Assume that Constant Dividend Growth Model and CAPM give you the same estimate of the cost of capital for equity, what is the beta of its stock?
By the Constant Dividend Growth Model:
Cost of Equity = D/P+g = 0.2/20+6%=7%
By CAPM, cost of equity = R(f)+ beta * market risk premium = 3% + beta* 4%,
Set this to be equal to 7%, solve for beta: beta=1
3. Firm ABC has a cost of equity of 8%, a cost of debt of 5%. It stock is traded at $10/share, and has 10 million shares outstanding. Its debt value is $20 million. Tax rate is 40%. What is its after-tax WACC?
Equity Value = 10*10=$100 million, Debt Value=$20 million
So, equity weight = 100/120=83.3%, debt weight=20/120=16.7%
After-tax WACC= equity weight * cost of equity + debt weight * effective cost of debt
=83.3%*8%+16.7%*5%*(1-40%) = 7.2%
4. Suppose you are the founder of a private company ABC. Initially you raised $500,000 from an angel investor from the first-round financing. As a result, both you and...

...it from completing the leveraged buyout acquisition from Kohlberg Kravis Roberts. Why do you think the bond-holders wanted to block this transaction? What argument can you make for and against the bondholders’ case?
The bond-holders suffer because they don’t have an opportunity to share in the higher returns earned by the company taking over after the transaction has increased the risk. The unexpected increase in the financial risk caused the value of the bonds to decline. An argument for the bondholders is their rights were violated that are supposed to be protected under the bond covenants. An argument against the bondholders is they accepted the default risk by becoming a creditor.
8. Under pressure from outside investors including corporate raider Carl Icahn, USX Corporation, the parent corporation for U.S. Steel and Marathon Oil, announced a plan to split its stock into separate steel and energy issues. The market response to this action was immediately positive, with the stock price of USX increasing $2.37 to close at $31.25 on the day of the announcement. Why do you think this action by USX was so well received by the stock market?
The company is doing well and the stock price is expensive for investors to acquire ownership. By splitting the number of shares and the price now being half of what it was the liquidity is increased. This promotes trade which in turn promotes an increase in price.
9. How can the adherence to high standards of ethical...

...one of the most secure and low-return investments in the world).
Corporate bonds (debt issues by companies to pay for usually new things the company wants to do - build a factory, expand stores, etc.) these are not as safe, and pay a rate of return based on the risk you are taking. They get basically a letter grade, and you get paid more interest the LOWER the grade.
10. Describe two examples of equity investments. (1-2 sentences. 1.0 points)
A stock or any other security representing an ownership interest.On a company's balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). Also referred to as "shareholders' equity".In the context of margin trading, the value of securities in a margin account minus what has been borrowed from the brokerage.In the context of real estate, the difference between the current market value of the property and the amount the owner still owes on the mortgage. It is the amount that the owner would receive after selling a property and paying off the mortgage.In terms of investment strategies, equity (stocks) is one of the principal asset classes. The other two are fixed-income (bonds) and cash/cash-equivalents. These are used in asset allocaon planning to structure a desired risk and return profile for an investor's portfolio. Investopedia explains Equity
The term's meaning depends very much on the context. In finance, in general, you can think of...

...CONCEPT QUESTIONS - CHAPTER 1
1.1 ( What are the three basic questions of corporatefinance?
a. Investment decision (capital budgeting): What long-term investment strategy should a firm adopt?
b. Financing decision (capital structure): How much cash must be raised for the
required investments?
c. Short-term finance decision (working capital): How much short-term cash flow does company need to pay its bills.
( Describe capital structure.
Capital structure is the mix of different securities used to finance a firm's investments.
( How is value created?
( List three reasons why value creation is difficult.
Value creation is difficult because it is not easy to observe cash flows directly. The reasons are:
a. Cash flows are sometimes difficult to identify.
b. The timing of cash flows is difficult to determine.
c. Cash flows are uncertain and therefore risky.
1.2 ( What is a contingent claim?
A contingent claim is a claim whose payoffs are dependent on the value of the firm at the end of the year. In more general terms, contingent claims depend on the value of an underlying asset.
( Describe equity and debt as contingent claims.
Both debt and equity depend on the value of the firm. If the value of the firm is greater than the amount owed to debt holders, they...

...e TCH321 – CORPORATEFINANCE MOCK EXAM Time: 1 hour 30 minutes The exam lasts 1 hour and 30 minutes and consists of 5 questions. Approved calculators are permitted. You are not allowed to use Excel. This is a closed book exam. You are NOT permitted to access any other material in either written or electronic form. All numerical answers should be reported to TWO decimal places. To ensure the accuracy of your answer, you should perform all intermediate calculations to at least THREE decimal places. Choose FIVE questions. DO show your working. Question 1. (20 marks) Suppose that you have the following information about a company Credit rating Beta Tax expense Pre-tax income Preferred dividend rate Preferred stock par value Preferred stock price Preferred stock outstanding Common stock price Common stock par value Common stock outstanding Expected next common stock dividend Long term bond yield-to-maturity Enterprise value Market risk premium 30 year Treasury bond yield-to-maturity AA 0.95 14,325,000 113,895,000 5.25% $100.00 $101.25 13,000,000 $53.29 $25.00 50,000,000 $1.95 7.55% 4,945,795,000 6.00% 4.75%
1
a. What is the estimated cost of common equity for the company? [4 marks]
b. What is the estimated after-tax cost of debt for the company? [4 marks]
c. What is the estimated cost of preferred equity for the company? [4 marks]
d....

...
3210AFE
ADVANCE CORPORATEFINANCE
Financial Analysis Report
New Hope Coal Corporation
(4780 words)
STUDENT NAME: Member 1: S2704148 zhiqi Liu
Member 2: S2682143 Sai Tie
Member 3: S2730145 Lingfeng Zhan
Member 4: S2594576 Xindan Chen
Member 5: S2700906 Yinghui Huang
TABLES
Executive summary............................................................................................3
Introduction........................................................................................................6
Firm structure and corporate governance.......................................................6
Remuneration….................................................................................................8
Capital structure.................................................................................................9
CAPM BETA AND FACTOR MODEL ANALYSIS……………………….9
WACC Analysis..................................................................................................11
Firm Estimation by FCF and PE ratio.............................................................12
Growth project analysis.....................................................................................13
Mergers and Acquisitions Targets Analysis…………………………………16
Cost of Debt & Equity Funding........................................................................19
Risk...

...(1) When calculating NPV, consider opportunity cost, ignore sunk cost.
(2) For bonds, the longer the time to maturity, the greater the interest rate risk;
the lower the coupon rate, the greater the interest rate risk.
(3) -1< 𝜌 ≤ 1 , the smaller the correlation, the greater the risk reduction
potential. If 𝜌 = 1, no risk reduction is possible.
(4)The value of firm is always the same under different capital structures. (MM
Proposition I (no taxes)).
(5) The expected return on equity is positively related to leverage because the
risk to equity holders increase with leverage.(MM Proposition II (no taxes)
𝑉 𝐿 = 𝑉 𝑈 + 𝑡 𝐶 𝐵, 𝑡 𝐶 𝐵 is the present value of the tax shield. 𝑉 𝑈 is unleveraged
firm value.
(6) Goals of CorporateFinance management: maximize the shareholder
wealth/ maximize share price/ maximize firm value.
(7) Stock holders may maximize their wealth at the expense of bondholders:
increasing leverage, increasing dividends, taking risky projects.
(8) Bond concepts: a. Bond prices and market interest rates move in opposite
directions. b. When coupon rate = YTM, price = par value, when coupon rate >
YTM, price > par value(premium bond)
(9) IRR disadvantage: IRR may not exist or there may be multiple IRR;
Problems with mutually exclusive investments(scale problem and timing
problem).
(10) Portfolio risk=nonsystematic risk (diversifiable) + systematic risk
(non-diversifiable).
(11) From the firm’s perspective, the expected...