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MAF302 – 2009 Exam Marking Guide
Question 1.
Part i.
In most large corporations, ownership and management are separated. What are the main implications of this separation?
Part ii.
A parcel of land costs $300,000. For an additional $500,000 you can build an office building on the property. The land and office building should be worth $900,000 next year. Suppose that common stocks with the same risk as this investment offer a 9% expected return per year. Would you construct the building? Why or why not?
Part iii.
Define the following terms:
a) LBO
b) Spin-off
c) Privatisation
d) Carve out
e) Leveraged restructuring
Part iv.
What impact would the following features have on the value of a corporate bond?
a) The borrower has the option to repay the loan before maturity
b) The bond is secured by a mortgage on real estate
(1) + (3) + (5) + (1) = 10 marks
SOLUTIONS
Part i.
Agency problems
Amplified by asymmetric information
(0.5 marks)
(0.5 marks)
Part ii.
NPV = C0 + C1/(1+r)
NPV = -800,000 + 900,000/1.09
NPV = $25,688
Yes you would build the office because the NPV is positive
(2 marks)
(1 mark)
Part iii
a) LBO – Leverage Buyout – Purchase of a business using mostly debt financing. (1 mark) b) Spin-off – A parent company creates a new company with part of its assets and operations. Shares in the new business are distributed to the parent’s stockholders (1 mark) c) Privatisation – A government-owned business is sold to private investors (1 mark)
MAF302 Exam Marking Guide 09
Page 1
MAF302 – 2009 Exam Marking Guide
d) Carve out – Simil;ar to a spin-off, except shares in the new company (subsidiary) are offered to the public. (1 mark)
e) Leveraged restructuring – A company moves to a much higher debt ratio. Proceeds of additional borrowing are paid out to stockholders (1 mark)
Part iv
a) Less
b) More
(0.5 marks for each, total 1 mark)
Question 2.
Part i.
The following table represents the yearly cash
Question 1.
Part i.
In most large corporations, ownership and management are separated. What are the main implications of this separation?
Part ii.
A parcel of land costs $300,000. For an additional $500,000 you can build an office building on the property. The land and office building should be worth $900,000 next year. Suppose that common stocks with the same risk as this investment offer a 9% expected return per year. Would you construct the building? Why or why not?
Part iii.
Define the following terms:
a) LBO
b) Spin-off
c) Privatisation
d) Carve out
e) Leveraged restructuring
Part iv.
What impact would the following features have on the value of a corporate bond?
a) The borrower has the option to repay the loan before maturity
b) The bond is secured by a mortgage on real estate
(1) + (3) + (5) + (1) = 10 marks
SOLUTIONS
Part i.
Agency problems
Amplified by asymmetric information
(0.5 marks)
(0.5 marks)
Part ii.
NPV = C0 + C1/(1+r)
NPV = -800,000 + 900,000/1.09
NPV = $25,688
Yes you would build the office because the NPV is positive
(2 marks)
(1 mark)
Part iii
a) LBO – Leverage Buyout – Purchase of a business using mostly debt financing. (1 mark) b) Spin-off – A parent company creates a new company with part of its assets and operations. Shares in the new business are distributed to the parent’s stockholders (1 mark) c) Privatisation – A government-owned business is sold to private investors (1 mark)
MAF302 Exam Marking Guide 09
Page 1
MAF302 – 2009 Exam Marking Guide
d) Carve out – Simil;ar to a spin-off, except shares in the new company (subsidiary) are offered to the public. (1 mark)
e) Leveraged restructuring – A company moves to a much higher debt ratio. Proceeds of additional borrowing are paid out to stockholders (1 mark)
Part iv
a) Less
b) More
(0.5 marks for each, total 1 mark)
Question 2.
Part i.
The following table represents the yearly cash