Amount Price_Old Value_Old Weights_Old

Company A 600.0 484.0 290,400.0 27.78%

Company B 10,000.0 21.0 210,000.0 20.09%
Company C 5,000.0 109.0 545,000.0 52.13%
Company D - - - -%
Company E - - - -%
SUM 15,600.0 614.0 1,045,400.0 100.00%

1 2 3 4
Stock A 10.00% 20.00% (5.00%) 15.00%
Diff. -% 10.00% (15.00%) 5.00%
Squared diff. -% 1.00% 2.25% 0.25%
Stock B 21.00% 7.00% 30.00% (3.00%)
Diff. 9.00% (5.00%) 18.00% (15.00%)
Squared diff. 0.81% 0.25% 3.24% 2.25%
Portfolio 10.00% 20.00% (5.00%) 15.00%
Squared diff. -% 1.00% 2.25% 0.25%

Company A Company B Portfolio

Expected Return 6,7% 9,9% #VALUE!
Volatility 17,7% 18,9%
Weights 50% 50.00%
Correlation 22.0
Covariance 550.00%
Variance #VALUE!
SD #VALUE!

Company A Company B Portfolio

Amount invested 1.00 1.00
Weight 50.0% 50.0%
Volatility 17.60% 19.40% 0.90%
Expected Return 7.20% 10.30% 8.75%
Correlation (1.0)
Risk Free rate 1.0%
Sharp ratio 0.35 0.48 8.61
Weight of portfolio A
Weight of portfolio B
Correlation between A and B portfolios
Risk free rate 1.00%
Expected return portfolio A 15.00%
Expcted return portfolio B 10.00%
Volatility portfolio A 35.00%
Volatility portfolio B 20.00%
Sharp Ratio Portfolio A 40.00%
Sharp Ratio Portolio B 45.00%
Fixed Expected return 15.00%
Weight of portfolio in the fund 100.00%
Weight of portfolio in the risk-free rate -%
Volatility of the fund 35.00%

Return 1 6.10%
Return 2 (5.32%)
Return 3 6.72%
Return 4 8.93%
Return 5
Return 6
Return 7
Return 8
Return 9
Return 10
Total Return 16.78%

Initial Value 1.0

Number of years 1.2
Number of years 4.0
CAGR 4.66%

Beta of Company A 2.3

Beta of Company B 0.74
Weight A 70.0%
Weight B 30.0%
Expected return Market 11.5%
Risk free-rate 4.5%
Beta Market 1.83
Expected return 17.32%

QUESTION 5 EQUATION
Sqrt[x^2*(0,4)^2+(1-x)^2*0,3^2+2*x*(1-x)*(-1)*0,4*0,3]=0
Price_Change Price_New Value_New Weights_New Return_Old Return_New
28.00 512.0 307,200.0 29.34% 12.00% 12.00%
5.00 26.0 260,000.0 24.83% 10.00% 10.00%
(13.00) 96.0 480,000.0 45.84% 8.00% 8.00%
- - - -% -% -%
- - - -% -% -%
20.0 634.0 1,047,200.0 100.00% 9.51% 9.67%

5 6 7 8 Average Variance Volatility CAGR Covariance Correlation

-% -% -% -% 10.00% 1.17% 10.80% 9.58%
-% -% -% -%
-% -% -% -%
(8.00%) 25.00% -% -% 12.00% 4.08% 20.20% 17.06%
(20.00%) 13.00% -% -%
4.00% 1.69% -% -%
-% -% -% -% 10.00% 1.17% 10.80% 9.58% (1.32%) (60.35%)
-% -% -% -%

17.6
17.2
1.023255814 1
Weight A 100%
Weight B -%
# years 4
Question 1 - Invest all cash and borrowings in one fund (J)
Cash 250,000.0
Borrowing 37,500.0
Interest Rate 2%
Weight 1.15
Expected return J 10%
Volatility J 26% -22
J's performance -28%
Expected return 11.20%
Volatility 29.900%
Realised Return (32.500%)

Question 2 Fund A Company B Fund C

Expected Return 18.70% 12.50%
Volatility 18.50% 37.90%
Sharpe Ratio 0.7621622 0.2084 0.610
Correlation A/B 0.273

Question 3 Stock A Stock B Market Portfolio

Expected Return 13% 16% 14.50%
Volatility 12% 23% 15.40%
Weights 50.00% 50%
Sharpe Ratio 0.91667 0.6087 0.8115343
Variance 2.37%

Question 4 Low Vol. & Same return High return & same vol.
x 1.4 2.2
Sell 15,000.0 15,000.0
Borrow 6,000.0 18,333.3
Buy Mkt port. 33,333.3
Buy Risk free invest. 21,000.0 -
Expedcted return 16.111%
Volatility 25.200%

Question 5
Risk free rate 4.00%
Expeted Return market 10.00%
Vol. Market 16.00%
Vol. Company 20.00%
Correlation 0.06
Beta 0.075
ER 4.45%

Beta of Company A 0.73

Market risk premium 6.00%
Risk free-rate 4.00%
Expected return 8.38%

Dividend yield 2.00%

Growth rate 7.00%
Risk-free rate 4.00%
Expected market return 9.00%
Risk premium 5.00%

Beta 0.31
Risk-free rate 2%
Risk premium 5%
Cost of debt 3.55%

D/E ratio 1.3

Cost of equity 3.40%
Pre tax cost of debt 2.00%
Tax rate 49.80%
WACC 0.29%

Asset beta 1
Debt or Equity beta 0
% of Debt or Equity on the Asset 0.5
Equity or Debt beta 2
Volatility stock A 30%
Volatility stock B 30%
Correlation (1.0)
Stock A zero risk 50%
Stock B zero risk 50%

Price per share t-1 370.4

Price per share t 399.4
Stock return between t-1 and t 7.83%

Risk free return 1.30%

Expected return of market portfolio 6.20%
Volatility of market portfolio 16.00%
Volatility of stock A 17.60%
Correlation between stock A and the market 0.87
Merck's Beta with respect to the market 0.957
Expected return under CAPM assumptions 5.56%

Average default rate 12.20%

Yield to maturity 11.70%
Expected loss rate 52.00%
Debt cost of capital 5.36%

Amount of Debt - Only works because no debt and no tax => Equity cost of capital = WACC => cross-p
Equity cost of capital 8.1%
Avg. Debt-to-value ratio 23.7%
Tax Rate -%
Cost of debt 1.6%
Cost of equity 10.12%
Fad followers 50%
Passive investors 45%
Informed traders 5.00%
Beta for informed investors 1.50
Expected return for infoormed investors 15%
Market return 11%
Risk free rate 5%
Alpha informed traders​ 1.00%
Alpha passive​investors 0 <= They follow the market
Expected return fad​followers 10.60%
Alpha fad followers​ (0.10%)

Market value 200.0

Debt value 100.0
Return on stock/equity 15.0%
Return on debt 6.0%
Expected return after repurchase of the debt 12.0%
Market value (n+1) 150.0
Debt value (n+1) 150.0
Expected return after this new transaction 18.0%

Market value 120

Beta of the stock A 1.5
Additionnal risk free debt 30
Additionnal cash 10
Beta after transaction 2.25

Percentage repurchased 40.0%

P/E 14.00
Earnings per share 1.50
Price/share 21.00
Interest expense 0.42
Earnings per share new 1.80
P/E (new) 11.67

Stock Price Per Share or Market capitalization 21.00

Earnings per share or Total Net earnings 1.50
P/E 14.00
Dividend payout ratio 30.00%
Rate of return 5.00%
Growth rate 2.00%
P/E 10.00

Funded with equity 2.00%

Funded with debt 98.00%
Market capitalization 10.00
Market book ratio 1.00
Expected return on assets 4.22%
Interest on debt 4.00%
Return on Equity 15.00%

Cash at the begining 95,000.00

Borrowing 50,000.00
Investment 145,000.00
Risk free rate 5.00%
Market expected return 11.00%
Beta 1.53
Expected return porfolio 0.14
Market Volatility 18.00%
Volatility of the investment 27.47%

Number of A shares outstanding 10.00

Price per A share 22.00
Number of B shares outstanding 20.00
Debt of stock B 60.00
Price per B share 8.00

Yield to maturity 2.05%

Probability of default per​year 1.00%
Expected loss rate in the event of default 40.00%
Estimated expected return for these bonds 1.65%

Yield to maturity bond 17.30%

Beta bond 0.31
Treasuries Yield 3.00%
Market Risk premium 5.00%
Expected loss rate in the event of default 60.00%
Return on debt 4.55%
Annual Probability of default 21.25%

Equity Beta 0.60

Risk free rate 4.00%
Market risk premium 5.00%
Return on Equity 7.00%
FCF Stock A 50
Stock A Growth rate 3%
Value Stock A 1250

Equity Beta 1.00

Risk free rate 4.00%
Market risk premium 5.00%
Return on Equity 9.00%
Share price 20.00
Shares outstanding 10.00
Market cap 100.00
Outstanding debt 50.00
Debt yield 4.50%
Equity Beta 1.00
Debt Beta -
Unlevered Beta 0.67
Unlevered cost of capital 7.33%
Return on equity 9.00%
Return on debt 4.50%
Unlevered cost of K 7.50%
Average Unlevered Cost of K 7.42%

Shares outstanding (m) 32.00

Share Price ($) 9.00
Market Cap ($m) 288.00
Outstanding debt ($m) 85.00
Cost of Equity K. 13.00%
Cost of Debt K. 9.00%
Tax rate 32.00%
Unlevered cost of K 12.09%
After tax debt cost of capital 6.12%
WACC 11.43%

Debt Outstanding 1.00

Equity 2.00
Tax Rate 35.0%
Cost of Debt K. 7.0%
Cost of Equity K. 12.0%
Pre-Tax WACC 10.33%
After-Tax WACC 9.52%

Shares Outstanding 37.00

Share Price 44.80
MV before 1,657.60
Planned Debt 1,076.70
Tax rate -%
Market value after issuance 2,734.30
Share Price before 44.80
Shares repurchased 24.03
Market value assets after share repurch. 1,657.60
Debt 1,076.70
Equity 580.90
Share Price 44.80

EBIT 15.00
CapEx + Net working capital (6.00)
Depreciation add-back 3.00
Tax rate 35.0%
Cost of K 10.0%
FCF growth rate 8.5%
FCF 6.75
Market value 450.00
Interest rate 8.0%
Max debt 187.50

Volatility stock A 30%

Volatility stock B 30%
Correlation (1.0)
Stock A zero risk 50%
Stock B zero risk 50%

Company Perf 1 10.0%

Company Perf 2 (17.0%)
Market Perf 1 6.0%
Market Perf 2 (10.0%)
Probability 1 100.0%
Probability 2 -%
Risk free rate 4.0%
Beta company 1.67
Expected return 7.3%
Risk free rate 4.60%
Correlation A/C 0.8

Correlation A/B 0.5

Risk free rate 2% Does the CAPM hold in this​economy? ​(Hint​: Is the market portfolio​efficient?
Covariance 0.01 The CAPM does not​hold, that​is, the market portfolio is not​efficient, because the market portfolio is not the portfolio with the highest Sh

Value 15000
Risk Free Rate 5%
ER Company 12%
Vol. Company 40%
ER Market 10%
Vol. Market 18%
SP Company 0.18
SP Market 0.28
ty cost of capital = WACC => cross-product to obtain new cost of equity
A B C D
0.8 1.4 1.4 1.406363636
86 99 587
16 85 341
5.375 1.164705882 1.721407625 1.17
e portfolio with the highest Sharpe ratio
 The last date on which the holder still has the right to
An optionthe
exercise is aoption.
contract thatoption
If the givesisone party thethe
American, right,
right
Definitions but not
can the obligation,
be exercised until to
thebuy or sell date;
exercise an asset at some
if it is
Option point in thethe
European, future.
option can be exercised only on the
Expiration date exercise
the price date.
at which the holder of the option has the right
Strike Price to
Anbuy or sell
option thatthe asset.
gives its holder the right to buy an
Call asset.
An option that gives its holder the right to sell an
Put asset.
When a party has a long position in a put, it has the right to sell the underlying asset at the strike price;
Explain
when theadifference
it has between
short position a long
in a call, position
it has in a put
the obligation to and a short
sell the position
underlying in aatcall.
asset the strike price
if exercised. These are clearly different positions.

What position has more downside​exposure: a short position in a call or a short position in a​put? That​is, in the worst​case, in which of these two posit
Downside exposure is larger with a short call ​(the downside is​unlimited) than with a short put​(the downside cannot be larger than the strike​price)

Bought a Call Bought a Put Sold a Call Sold a Put

Strike price 80.00 74.00 80.00 10.00
Price of option 6.27 1.00 6.27 -
Price of stock 95.00 66.99 82.00 5.00
Gain/(Loss) 8.73 6.01 4.27 (5.00)
Percentage of return 39.23% 501.00%
hich of these two positions would your losses be​greater?
What options does a firm have to spend its free cash flow​(after it has satisfied all interest​obligations)?
(i) repurchases shares; (ii) make investments; (ii) pay dividends

Dividends signal
Good news By increasing dividends managers signal that they believe that future earnings will be high enough to maintain
Bad news Raising dividends signals that the firm does not have any positive NPV investment​opportunities, which is bad

Share repurchase signal

Good news By choosing to do a share​repurchase, management credibly signals that it believes the stock is undervalued.

Definition
Ex-dividend day 1st day when no dividend

Dividend per share 4.0

Last-cum dividend per share 50.0
Ex-dividend price 46.0

Market Value 403.00

Including cash 200.00
Debt -
Shares Outstanding 350.00
Current Stock Price 1.15
Share price after div. 0.58
# Share repurchase 173.70
Share price after repurchase 1.15
Debt/equity -
Debt/value ratio (after dividend payment) -

Period Price Dividend Return by period

1 99.20 0.90
2 62.90 0.90 (35.69%)
3 76.20 - 21.14%
4
5
6
7
 8
9
10
11
12
Total Return (22.09%)

370.4
399.4
7.8%

Period Price Dividend # Shares Value of Portfolio

1 504.00 - 1.00 504.00
2 108.00 5.00 540.00
3 350.74 - 5.00 1,753.70
4
5
6
7
8
9
10
11
12
Total Return

Share Price
504
20%
100.8
 37
44.8
1657.6
37
29.1
1076.7
2734.3
36.95
ngs will be high enough to maintain the new dividend payment
stment​opportunities, which is bad news.

believes the stock is undervalued.

Return by period

7.14%
224.76%

247.96%
What annual probability of default would be consistent with the yield to maturity of these bonds? What is the bonds expedcted return ? Estimated the expected ret
Yield to maturity bond 8.90%
Beta bond 0.06
Treasury Yield / Risk Free rate 2.60%
Market Risk premium 4.60%
Expected loss rate in the event of default 60.00%
Annual default rate 2.20%
Estimated expected return (CAPM) 2.88%
Estimated expected return (prob of default) 7.58%
Annual Probability of default 10.04%

If your firm’s project is all equity financed, estimate its cost of capital.
Equity Beta 0.84
Risk free rate 4.10%
Market Risk premium 4.80%
Cost of capital 8.13%

What is the NPV of this project? With two different outcomes

Outcome 1 130.0
Outcome 2 180.0
Probability 1 50.00%
Probability 2 50.0%
FCF 155.0 <= Expected return from the project
Investment required 100.0
Cost of capital 20.00%
NPV 29.167

Project financed via Equity. The equity holders will receive the cash flows of the project in one year. What is the initial market value of the unlevered equity? <=> H
FCF 155.00
Cost of capital 20%
Equity Value 129.167 <= Value of unlevered equity
Project financed via debt
Debt 100.0 <= Required investment
Interest rate 10.0%
FCF outcome 1 20.000
FCF outcome 2 70.000
Initial Value (MM) 129.167 <= See C32 - According to Modigliani Miller, capital stucture has no impact.

What is X’s unlevered cost of capital? What is X’s after-tax debt cost of capital? What is X's weighted average cost of capital (WACC)?
Shares outstanding (m) 40.00
Share Price ($) 10.00
Market Cap ($m) 400.00
Outstanding debt ($m) 100.00
Cost of Equity K. 15.00%
Cost of Debt K. 8%
Tax rate 40%
Unlevered cost of K (Ru) 13.6%
After tax debt cost of capital (Rd) 4.8%
WACC (Rwacc) 13.0%

Raise X to fund expansion by issuing either new shares or new debt

Shares outstanding (m) 37.00
Share Price ($) 44.80
Market Cap ($m) 1,657.60
Expected Earnings
Amount to raise 180.00
Debt interest rate 5.0%
New EPS (equity) -
Interset on new debt 9.00
New EPS (debt) (0.24)
P/E ratio (equity) #DIV/0!
P/E ratio (debt) (184.18)

Equity Beta 1.00

Risk free rate 4.00%
Market risk premium 5.00%
Return on Equity 9.00%
Share price 20.00
Shares outstanding 10.00
Market cap 100.00
Outstanding debt 50.00
Debt yield 4.50%
Equity Beta 1.00
Debt Beta -
Unlevered Beta 0.67
Unlevered cost of capital 7.33%
Return on equity 9.00%
Return on debt 4.50%
Unlevered cost of K 7.50%
Average Unlevered Cost of K 7.42%

Debt Outstanding 1.00

Equity 2.00
Tax Rate 35.0%
Cost of Debt K. 7.0%
Cost of Equity K. 12.0%
Pre-Tax WACC 10.33%
After-Tax WACC 9.52%

Bond
Nominal 100
Prix initial 97
Coupon annuel payé 4.50%
Prix final 102
Rentabilité 9.79%

Beta 0.31
Risk-free rate 2.00%
Risk premium 5.00%
Cost of debt 3.55%
turn ? Estimated the expected return using two different methods?

ue of the unlevered equity? <=> How much money can be raised?

s no impact.

capital (WACC)?
Debt Value 10.00
Coupon 2.0%
Interest payment 0.20
Tax Rate 20.0%
Cost of Debt K. 2.0%
Tax Shield 0.040
PV(Tax Shield) 2.00

EBIT 325.0
Interest expenses 125.0
Tax rate 40.0%
Net Income 120.0
Interest Tax Shield 50.0

Debt Outstanding 1.70 Question 3 Quiz 9

Equity 2.10
Tax Rate 35.0%
Cost of Debt K. 8%
Cost of Equity K. 14%
Pre-Tax WACC 11.32%
After-Tax WACC 10.06%

Shares outstanding 30.0

Share Price 15.0
Equity 450.0
Debt outstanding 150.0
Equity cost of capital 10.00%
Debt cost of capital 5.00%
Tax rate 35.00%
Pre-Tax WACC 8.75%
After-Tax WACC 8.31%

Leverage impact on share price

Shares outstanding 8.75
Tax rate 35.00%
Cash increase / (decrease) (50.00) <= Dividiend or share repurchase
Leverage impact 50.00
PV of tax savings 17.50
Share price increase/(decrease) 2.00

All-equity firm Raise debt to repurchase shares

Initial Assets 403.00
Shares outstanding initial 4.30
Tax rate -%
Initial Share price 93.72
Planned debt 150.00
Equity before repurchase 403.00
Share price before repurchase 93.72
Share price tender offer 93.72
Equity after repurchase 253.00
Shares outstanding after 148.40
Share price after repurchase 1.70

All-equity firm Raise debt to repurchase shares

# Shares Outstanding 4.30
Share Price 93.72
MV before 403.00
Planned Debt 150.00
Tax rate -%
MV after issuance 553.00
Share Price before 93.72
# Shares repurchased 1.60
MV assets after share repurch. 403.00
Debt 150.00
Equity 253.00
Share Price 93.72

EBIT 15.00
CapEx + NWC (6.00)
Depreciation add-back 3.00
Tax rate 35.0%
Cost of K 10.0%
FCF growth rate 8.5%
FCF 6.75
MV 450.00
 Interest rate 8.0%
Max debt 187.50
Debt/Equity ratio 41.67%

Is there a tax incentive today for Colt to choose a​debt-to-value ratio that exceeds 50%​? No, because the most they should borrow is ​$C81 ​million, which

Long Term Financing

The company currently has C89 million shares of stock outstanding at a price of C90 per share. The company would like to raise money and has announ
# of shares outstanding 10.00
Share price 40.00
# of rights distributed 10.00
# of rights to purchase one share 5.00
Amount raised 80.00 <= Assuming the rights issue is​successful, how much money will it​raise?
# shares investor can purchase 2.00
New share price 40.00 <= What will the share price be after the rights​issue? (Assume perfect capital​markets.)

Suppose instead that the firm changes the plan so that each right gives the holder the right to purchase one share at C per share
# of rights to purchase one share (new) 1.00
Share price (new) 8.00
Amount raised 80.00 <= How much money will the new plan​raise?
# shares investor can purchase 10.00
New share price 24.00 <= What will the share price be after the rights​issue?

Which plan is better for the​firm's shareholders? Which is more likely to raise the full amount of​capital?
If all rights are​exercised, the shareholders are indifferent between the first plan and the second plan. Shareholders are less likely to tender their shares u

Explain why bond issuers might voluntarily choose to put restrictive covenants into a new bond issue.
Bond issuers benefit from placing restricting covenants because by doing so they can obtain a lower interest rate.

Explain why the yield on a convertible bond is lower than the yield on an otherwise identical bond without a conversion feature.
Bond issuers benefit from placing restricting covenants because by doing so they can obtain a lower interest rate.

Why do bonds with lower seniority have higher yields than equivalent bonds with higher​seniority?
1. Debentures and notes are unsecured. Because more than one debenture might be​outstanding, the​bondholders' priority in claiming assets in the even
2. When a firm conducts a subsequent debenture issue that has a lower priority than its outstanding​debt, the assets not pledged as collateral for outstan
3. Because holders of lower seniority debt are likely to receive less in the event of​default, the yield on the lower seniority debt is higher than that of more
4. Most debenture issues conatin clauses restricting the company from issuing new debt with equal or higher than existing debt.
ould borrow is ​$C81 ​million, which would give the firm a​debt-to-value ratio of C82. ​So, there is no tax incentive to choose a ratio above this.

e to raise money and has announced a rights issue. Every existing shareholder will be sent C94 right per share of stock that he or she owns. The company plans to require C90 righ

will it​raise?

e perfect capital​markets.)

less likely to tender their shares under the first plan than under the second ​plan, and because of this the second plan is more likely to be successful.

nversion feature.

ority in claiming assets in the event of​default, known as the​bond's seniority is important
t pledged as collateral for outstanding bonds cannot be used to pay off the holders of subordinated debentures until all more senior debt has been paid off.
y debt is higher than that of more senior equivalent debt.
mpany plans to require C90 rights to purchase one share at a price of $40 per share.
Question 1
Suppose the market portfolio has an expected return of 10% and a volatility of 20%​, while​Microsoft's stock has a volatility of 30%.

a. Given its higher​volatility, should we expect Microsoft to have an equity cost of capital that is higher than 10%?
No, volatility includes diversifiable​risk, and so cannot be used to assess the equity cost of capital.

b. What would have to be true for​Microsoft's equity cost of capital to be equal to 10%​?
Microsoft stock would need to have a beta that s equal to 1.

Question 2 Price/Share ($) Number of Shares Outstanding

A 10.0 10,000,000.0
B 20.0 12,000,000.0
C 8.0 3,000,000.0
D 50.0 1,000,000.0
E 45.0 20,000,000.0

a. How much have you invested in Stock​A?

Amount invested in A 50000.0

b. How many shares of Stock B do you​hold?

Number of shares hold in Stock C 1500
Number of shares hold in Stock B 6000

c. If the price of Stock C suddenly drops to 4$ per​share, what trade in Stock C do you need to execute to maintain your portfolio at the same proportions as the m
You should leave unchanged the amount of Stock C in the portfolio.

Question 3
a. Could you use the same estimate for the market risk premium when applying the​CAPM?
No

b. If​not, how would you estimate the correct risk premium to​use?
The expected return of this portfolio is lower than the​S&P 500 because this portfolio contains bonds. Use the historical excess return of this new index to estimat
Monthly Returns
Date Nike HP Inc. S&P 500
Jan-11 -3.44% 8.53% 2.33%
Feb-11 7.94% -4.51% 3.47%
Mar-11 -14.62% -5.91% -0.01%
Apr-11 8.75% -1.47% 2.90%
May-11 2.59% -7.41% -1.12%
Jun-11 6.92% -2.30% -1.71%
Jul-11 0.19% -3.38% -2.00%
Aug-11 -3.88% -25.99% -5.50%
Sep-11 -0.96% -13.29% -6.91%
Oct-11 12.68% 18.53% 10.92%
Nov-11 -0.18% 5.04% -0.41%
Dec-11 0.57% -7.41% 1.02%
Jan-12 7.91% 8.62% 4.64%
Feb-12 3.78% -9.54% 4.34%
Mar-12 0.82% -5.37% 3.21%
Apr-12 3.16% 3.90% -0.67%
May-12 -2.98% -8.40% -6.01%
Jun-12 -18.86% -10.75% 4.05%
Jul-12 6.35% -9.30% 1.18%
Aug-12 4.68% -7.46% 2.51%
Sep-12 -2.52% 1.85% 2.54%
Oct-12 -3.72% -18.82% -1.82%
Nov-12 6.68% -6.21% 0.57%
Dec-12 6.30% 10.72% 0.90%
Jan-13 4.75% 15.86% 5.12%
Feb-13 1.15% 21.99% 1.28%
Mar-13 8.36% 19.03% 3.80%
Apr-13 7.78% -13.59% 1.92%
May-13 -2.72% 18.54% 2.36%
Jun-13 3.28% 2.15% -1.34%
Jul-13 -1.19% 3.55% 5.17%
Aug-13 0.18% -13.01% -3.00%
Sep-13 15.63% -5.39% 3.18%
Oct-13 4.30% 16.10% 4.63%
Nov-13 4.46% 12.23% 2.96%
Dec-13 -0.33% 2.83% 2.58%
Jan-14 -7.36% 3.65% -3.52%
Feb-14 7.81% 3.03% 4.55%
Mar-14 -5.67% 8.79% 0.83%
Apr-14 -1.23% 2.16% 0.70%
May-14 5.76% 1.33% 2.32%
Jun-14 0.83% 1.02% 2.06%
Jul-14 -0.54% 5.73% -1.34%
Aug-14 2.15% 6.71% 3.95%
Sep-14 13.56% -6.24% -1.37%
Oct-14 4.23% 1.16% 2.36%
Nov-14 6.80% 8.86% 2.75%
Dec-14 -2.88% 3.15% -0.25%
Jan-15 -4.06% -9.97% -2.96%
Feb-15 5.58% -3.57% 5.62%
Mar-15 3.31% -10.10% -1.57%
Apr-15 -1.49% 5.81% 0.98%
May-15 3.15% 1.30% 1.29%
Jun-15 6.25% -9.62% -2.02%
Jul-15 6.67% 1.70% 2.26%
Aug-15 -3.01% -8.06% -6.10%
Sep-15 10.29% -8.10% -2.53%
Oct-15 6.55% 5.27% 8.51%
Nov-15 0.95% 2.42% 0.37%
Dec-15 -5.26% -4.59% -1.73%
Jan-16 -0.78% -17.99% -4.98%
Feb-16 -0.68% 10.09% -0.08%
Mar-16 0.07% 16.41% 6.72%
Apr-16 -4.12% -0.41% 0.39%
May-16 -6.31% 9.05% 1.70%
Jun-16 0.25% -5.28% 0.34%
Jul-16 0.54% 11.63% 3.65%
Aug-16 3.86% 2.57% 0.12%
Sep-16 -8.38% 8.94% 0.00%
Oct-16 -4.69% -6.70% -1.73%
Nov-16 -0.22% 6.28% 3.68%
Dec-16 1.88% -2.78% 2.03%
Jan-17 4.07% 1.42% 1.79%
Feb-17 8.05% 15.42% 3.93%
Mar-17 -2.19% 3.70% 0.13%
Apr-17 -0.57% 5.26% 0.99%
May-17 -4.37% -0.32% 1.41%
Jun-17 11.68% -6.12% 0.64%
Jul-17 0.08% 9.27% 2.05%
Aug-17 -10.26% -0.11% 0.29%
Sep-17 -1.82% 5.31% 2.01%
Oct-17 6.06% 7.97% 2.36%
Nov-17 9.88% -0.46% 3.06%
Dec-17 3.86% -1.40% 1.21%

A. Estimate the alpha of Nike

Nike estimated monthly alpha 61.9682%

B. Estimate the alpha of HP inc.

HP Inc. estimated monthly alpha 156.5482%

Question 5
Yield to maturity Ralston Purina AA 2.05%

a. What is the highest expected return these bonds could​have?

The highest expected return these bonds could have is 2.05%

b. At the​time, similar maturity Treasuries had a yield of 1.50%. Could these bonds actually have an expected return equal to your answer in part ​(a​)?
No if the bonds are​risk-free, the expected return equals the​risk-free rate, and if they are not​risk-free the expected return is less than the yield.

c. If you believe Ralston​Purina's bonds have 0.5% chance of default per​year, and that expected loss rate in the event of default is 60% ​, what is your estimate o
Chance of default per​year 0.50%
Expected loss rate in the event of default 60.00%
Estimated expected return for these bonds 1.75%
 Amount invested in C 12000

at the same proportions as the market​portfolio?

urn of this new index to estimate the correct risk premium.

answer in part ​(a​)?
han the yield.

s 60% ​, what is your estimate of the expected return for these​bonds?

If your​firm's project is​all-equity financed, estimate its cost of capital
Equity Beta 0.85
Risk Free rate 4.00%
Market Risk Premium 5.00%
Cost of capital 8.25%

After computing the​project's cost of capital you decided to look for other comparables to reduce estimation error in your cost of capital estimate.
Share price 20.0
Shares outstanding 15.0
Market cap 300.0
Outstanding debt 100.0
Debt yield 4.50%
Equity Beta 1.00
Debt Beta -
Unlevered Beta 0.75
Unlevered cost of capital 7.75%

Estimate​Thurbinar's equity cost of capital using the CAPM. Then assume its debt cost of capital equals its yield and using these​results, estimate​Thurbinar's unle
Cost of equity 9.00%
Cost of debt 4.50%
Unlevered cost of capital 7.88%

Difference between C18 and C23? In the first​case, we assumed the debt had a beta of zero so we assumed the cost of debt was the riskless​rate, while in the se

Average A with B 7.81%

Average A, B and C 8.03%

All-equity financed firm with 2 divisions

Division A Division B Firm
Beta 0.60 1.09 0.67
FCF 42.00 59.00
Growth Rate 4.00% 3.00%
Risk Free rate 2.00%
Market Risk Premium 4.00%
Cost of Equity capital 4.40% 6.36% 4.68%
Value 10,500.00 1,755.95 12,255.95

Is this cost of capital useful for valuing​Weston's projects? Not​useful! Individual divisions are sometimes less risky and sometimes more risky than the​firm's cost
How is​Weston's equity beta likely to change over​time? Over​time, Weston's equity beta will decline toward 0.60​, as the soft drink division has a higher growth rat

Project cash flow dependanding on external conditions

Question 5
Expected FCF ($k) 163.100 FCF_1 ($k) 140.60
NPV ($k) 46.626 FCF_2 ($k) 185.60
Initial invest ($ 95.20
Cost of K 15%
Initial mkt value 141.826 Debt 95.20
risk free rate 6%
Initial Levered equity 46.626
Debt CF in 2 100.912
Levered equity CF 2 84.688
Debt CF in 1 100.912
Levered equity CF 1 39.688
estimate​Thurbinar's unlevered cost of capital

kless​rate, while in the second case we assumed the cost of debt was the yield on debt
risky than the​firm's cost of capital.
n has a higher growth rate and so will represent a larger fraction of the firm.
According to MM Proposition​I (Modigliani Miller), what is the stock price for Stock B? Alpha industries - Omega technologies
Stock A Stock B
Share price 23.00 9.06 <= A and B should have the same value
Outstanding shares 9.00 16.00
Debt - 62.10
Value 207.00 207.00 According to MM1, A and B shoud have the same value
Equity 207.00 144.90

Suppose B stock currently trades for $x (above than before ) per share. What arbitrage opportunity is​available? What assumptions are necessary to exploit this​o

Sell D5 millions shares of B at the current price of x and buy C5 million shares of A at teh current price of C4 and borrow D6 million.

Debt buy back

Company A
MV (n) 200.0 Suppose GP issues 100m of new stock to buy back the debt. What is the expected return of the stoc
Debt value (n) 100.0
Cost of equity (Re) 15.0%
Cost of debt (Rd) 6.0%
Expected return (Ru) 12.0%

Suppose instead GP issues 50m million of new debt to repurchase stock.

MV (n+1) 150.0
Debt value (n+1) 150.0
Expected Return 18.0%

If Rd increases => Re decreases

With perfect capital​markets, what will the beta of company A's stock be after this​transaction? Indell

Company A
Bêta (n) 1.8
Market Value 90.0
Debt issuance 24.5
Cash used to repurchase 17.0
Net debt 41.5
Equity (n+1) 48.5
Bêta (n+1) 3.34

Company A is an​all-equity firm whose stock has a beta of C45 and an expected return of C47 suppose it issues new risk-free debt with a C48 yield and repurchas

Company A
Beta (n) 0.7
Expected Return 19.50%
Debt Yield 3.50%
Stock repurchase 45%
Beta (n+1) 1.27 <= What is the beta after this​transaction?
Expected Return after stock repurchase 32.59% <= What is the expected return after this​transaction?
Expected EPS (n) 1.50
Forward P/E (n) 12.00
Price/share 18.0
Interest expense 0.28
Expected EPS (n+1) 2.21 Does this change benefit the​shareholder? It does nor benefiy the shareholders because the risk of
P/E (n+1) 8.14 Is this change in the​P/E ratio​reasonable? It is reasonable.​P/E has gone down because risk has go

New capital requirements will necessitate that Levered Bank increase its equity to C72 of its capital structure. It will issue new equity and use the funds to retire ex

Levered Bank
Mkt Cap. 10.540
Debt 98.40%
Equity (n) 1.60%
Debt Interest rate 3.90%
MKT to book ratio 120%
ER 4.25%
Return on Equity (ROE) N 25.78%
Equity (n+1) 3.20%
Return on Equity (ROE) N+1 14.84%
Premium N 21.88%
Premium N+1 10.94%
Return Volatility (N) 0.26%
ROE Volatility N 16.25%
ROE Volatility N+1 8.13%
Does the reduction in Levered​Bank's ROE after the increase in equity reduce its attractiveness to​shareholders ? No premium and risk both fall by premium and r
 Omega technologies

ud have the same value

s are necessary to exploit this​opportunity?

is the expected return of the stock after this​transaction?

t with a C48 yield and repurchase C49 of its stock. Asumme perfect cap. markets

hareholders because the risk of holding equity has increased.

gone down because risk has gone up.

ity and use the funds to retire existing debt. The interest rate on its debt is expected to remain at C65.
d risk both fall by premium and risk both fall by one-half
Question 1
N N+1
Net Income 20.75 20.10 <= A
FCF 22.15
Tax Rate 35.0%
Increase in Leverage 1.00

B=> No impact on FCF

Question 2
N
Debt Value 10.00
Coupon 6.0%
Interest payment 0.60
Tax Rate 35.0%
Cost of Debt K. 4.0%
Tax Shield 0.2100 <= A
PV(Tax Shield) 5.250 <= B

Question 4
N
# Shares Outstanding 30.00
Share Price 8.00
MV before 240.00 <= A
Planned Debt 56.00
Tax rate 35%
MV after issuance 315.60 <= B
Share Price before 8.65 <= C
# Shares repurchased 6.47 <= C
MV assets after share repurch. 259.60 <= D
Debt 56.00 <= D
Equity 203.60 <= D
Share Price 8.65 <= D
Question 5
N
EBIT 15.00
CapEx + NWC (6.00)
Depreciation add-back 3.00
Tax rate 35.00%
Cost of K 10.00%
FCF growth rate 8.50%
FCF 6.75
MV 450.00 <= A
Interest rate 8.00%
Max debt 187.50 <= B

C ​No, because the most they should borrow is ​$187.5 ​million, which would give the firm a​debt-to-value ratio of 41.7​%. ​So, the
-to-value ratio of 41.7​%. ​So, there is no tax incentive to choose a ratio above this.
Question 1
Mkt Value 500.00 500
o/w cash 50.00 50
Debt 200.00 200
Shares Outstanding 10.00 10
Current Stock Price 30.00 <= A 30
Share price after div. 25.00 <= B 25
# Share repurch. 1.67 1.666666667
Share price after repurch. 30.00 <= C 30
Debt/equity 0.80 <= D 0.8
Debt/value ratio (after div.) 0.44

Question 2
A. All the above

Question 3
Treasury bill 100.00
Interest rate 7.00%
Shares Outstanding 10.00
A The value of Kay would remain the same
B Fall
D Neither benefit nor hurt

Dividends signal
Good news By increasing dividends managers signal that they believe that future earnings will be high enough to maintain the new divi
Bad news Raising dividends signals that the firm does not have any positive NPV investment​opportunities, which is bad news.

Share repurchase signal

Good news By choosing to do a share​repurchase, management credibly signals that it believes the stock is undervalued.
ugh to maintain the new dividend payment
es, which is bad news.

s undervalued.
Question 1
# of shares available 1.80
Share price 13.40

Question 2
# of shares outstanding 8.00 10
Share price 39.00 40
# of rights distributed 8.00 10
# of rights to purchase one share 5.00 5
Amount raised 62.40 <= A 80
# shares investor can purchase 1.60 2
New share price 39.00 <= B 40
If all rights are​exercised, the shareholders
# of rights to purchase one share (new) are indifferent
1.00 between 1
Share price (new) the first plan
9.00 8
and
Amount raised the second72.00 <= Shareholders
plan. C are 80
# shares investor can purchase less 8.00 10
likely to tender their shares under the first plan than under the second​plan, and because of this
New share price the second plan<= D
24.00 Correct answer = 24
E is more likely to be successful.

Question 3
A Bond issuers benefit from placing restricting covenants because by doing so they can obtain a lower interes

Question 4
A Bond issuers benefit from placing restricting covenants because by doing so they can obtain a lower interes

Question 5
Debentures and notes are unsecured. Because more than one debenture might be​outstanding, the​bondho
When a firm conducts a subsequent debenture issue that has a lower priority than its outstanding​debt, the
Because holders of lower seniority debt are likely to receive less in the event of​default, the yield on the low
Most debenture higher
convertible bonds : bond into stock is valuable , price higher, yield lower.
 nd because of this

ey can obtain a lower interest rate.

ey can obtain a lower interest rate.

t be​outstanding, the​bondholders' priority in claiming assets in the event of​default, known as the​bond's seniority is important
han its outstanding​debt, the assets not pledged as collateral for outstanding bonds cannot be used to pay off the holders of subordinated debentures until all more senior debt has b
​default, the yield on the lower seniority debt is higher than that of more senior equivalent debt.
ntil all more senior debt has been paid off.
Question 1
Strike price 40.00
A 15
B 0
C

Question 2
Strike price The price at which the holder of the option has the right to buy or sell the asset.
Call An option that gives its holder the right to buy an asset.
Expiration date The last date on which the holder still has the right to exercise the option. If the option is​American, the right can be exercised until the
Put An option that gives its holder the right to sell an asset.
Option A contract that gives one party the​right, but not the​obligation, to buy or sell an asset at some point in the future.

Question 3
European options can be exercised only on the exercise​date, while American options can be exercised on any date prior to the exerc

Question 4
Question 5
Downside exposure is larger with a short call ​(the downside is​unlimited) than with a short put​(the downside cannot be larger than the
an be exercised until the exercise​date; if it is​European, the option can be exercised only on the exercise date.

ny date prior to the exercise date. Both types of options are traded in Europe and in America.
annot be larger than the strike​price)