Finance Notes

Topics: Corporate finance, Bond, Stock Pages: 42 (3249 words) Published: June 28, 2013
Assignment No 1 (To be handed in Week 2)

See course package: Investment Analysis and Lockheed

Tri Star

Assignment No 2 (To be handed in Week 3)

QUESTIONS FOR MRC CORPORATION

l

'

What is the value today (end 1960) of American Rayon, assuming that the terminal value (in 1967) of the company's operating assets is equal to the book value of its invested operating capital (PPE + WCR) in 1967? Do you agree with this assumption and can you provide some better alternatives discussed in class?

2'

depreciation to keep revenues constant at $ 55 m.

What is the value of American Rayon, if MRC takes it over and improves the company as follows: sales after 1963 don't fall but remain at a level of $ 55 m "forever,, and other value drivers such as margins, tax tates, WCR/sales ratios, as well as capex and depreciation remain the same until 1967. Afterwards, the company will have to invesi un u-ount of $ 3m equal to

3'

What is the value of American Rayon if MRC buys the company, and liquidates it assuming that, by the end of 1961 it can (a) recover the working capitaT, uúi has to'scraf ãtt n^.c assets at fu) zero valte?

Note
a. Discount rate is 20%o b. Assume forecasts in exhibit 6 are forecasts of operating cash flows c' only (see exhibit 4) is àvailaule to estimate WCR/Sales ratio (do not include urities under operating cash to calculate wCR, it as value of "ãrr.i¿.. ts) d' For the class discussion you should be prepared to explain your valuation estimates e. Consider'Other' Assets of $125 000 as non-operatingãssets and ignore them

1 U' non-ope

2

6
University of Chicago

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"45'1415: Summer 201 3 - Corporation Finance,,

Assignment No 3 (To be handed in Week 7)

1. You have a project that requires an inve off either $6m or $2m next year with e using debt, However, your lenders believ namely $lOm or $0m, again with equal pr rate is (a)
0olo.

If you issue$3m of straight debt, what is the fair face value according to you? According to your lenders?

(b)

you issue convertible debt with a face value of $4m, and a conversion ratio (fraction of assets going to converting bondholders) of 0.6, what is the fair value of the debt today according to you? According to your lánders? the advantage of using convertible debt in this setting.

If

(c) Explain

2'

Consider a firm in the situation described below. Current assets in place generate 25m in cash today and either l20m or 60m af t : l. Today the firm has the opportunity to invest ìn one of two projects, both costing25mwith random 7. I payoffs given berow. The firm currently also has a zero-coupon bond outstanding with face value 100m, due t: 7. The riskfree rate is 0%o and, everyone is risk_neutral.

at

t:0
On-going

project

t:l
State 1:720m (probability 0.5) State 2: 60m (probabiliry 0.5) State 1: 32m State 2: 30m State

Generates 25m in cash

Safe

project project

Cost: 25m

Risky

Cost: 25m

l:

lOm

State 2: 60m

a) Which projecr has the higher NpV?
b) If managers have to choose one of the two projects, which one will they take and why? Please support your answer with calculations.

c) If manage

most and why?
in at

implementing either project (i,e. they can invest choose not to invest in either), what will they do r with calculations.

d)

When a firm has_a fairly high probability of financial distress, it may sometimes be the case that by forgiving some of the debt outstanding (thaí is, ugr""i"g-r"ìl¡, ,n" bondholders to reducing the total face value from F1 t" È, . E,;, ìne toial Àarket value of debt actually increases (MV2 > l'4Vr). Briefly expúin *ñi ,hi, -iËliî. ,rr. case.

University of Chicago

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"45'1415: Summer 2013 - Corporation Finance',

Assignment No 4 (to be handed in, week 8)

ABC has cunently 1.5 million shares outstanding and its stock plice is $ 20. It has a new investment opportunity which cost $ 6 rrillion and generates a present value of...
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