Bond Valuation and Financial Decision Making Essay

Bond Valuation

1- Company X issued 5-year bond with $10,000 par value and 6% coupon on January 1, 2017. You buy this bond from the original purchaser on January 1, 2019, immediately after the 2nd coupon payment is made. First, write out the cash flows (appropriately using negative and positive signs) from the perspective of Corporation X. Second, what is the fair value of the bond if when you purchase it on January 1, 2019, the coupon rate for the same bond has increased to 9%?

2- ABC Corp. uses 30% debt and 70% common stock in its capital structure. The average cost of debt is 5%. The risk-free rate is 3%. The expected return from the market is 8%. ABC Corp. has a beta of 1.1 and a tax-rate of 20%. What is the ABC’s WACC?

3- DEF Corp. has a WACC of 10%. The company is considering a project where it could spend $8M today and expects to receive incremental cashflows of $1M, $3M, and $10M over the next 3 years (exactly 1 year, 2 years, and 3 years from now respectively). Should the company do the project based on NPV?

4- Universal Studios is considering producing a movie called “Hostageâ€Â featuring Liam Neeson who has a very particular set of skills that they think could potentially lead to a sequel if the first movie is well received. To produce “Hostageâ€Â, it will cost $175M today and they have two estimates on cash flows:
Good Case (50%) = $250M exactly one year from now, and then $50M in exactly 2 years
Bad Case (50%) = $150M exactly one year from now, and then $25M in exactly 2 years
 
In addition, if the good case prevails, Universal Studios will be able to spend $200M exactly 2 years from now on “Hostage 2â€Â which is expected to yield $275M exactly 3 years from now and $50M exactly 4 years from now.
Universal studios has a WACC of 7.5%. What is the value of the option to produce “Hostage 2â€Â?

5- XYZ Corp stock currently sells for $100. John buys a call option for $5 with strike price of $101 and expiration date 1 year from now. At expiration, the stock is trading for $104. How much did John profit or loss?

6- If the appropriate discount rate is 5%, how much is each of the following worth today and which would you choose?
 
a.$50,000 today plus $60,000 exactly 2 years from today
b.$30,000/year for 4 years starting exactly 1 year from today
c.$5,300/year forever with the first payment starting exactly 1 year from today

7- Wayfair has a target capital structure that consists of 35% debt and 65% equity and uses the Residual Dividend Model to make its dividend decisions. The company anticipates that its capital budget for projects for the upcoming year will be $35,500,000. If Wayfair reports net income of $50,000,000, what is the dividend payout ratio? How much debt will Wayfair raise to pay for its capital projects?

8- XYZ Corp stock currently trades for $100. The company undergoes a 7 for 2 stock split. Assuming nothing else changes with the company, how much should the stock be worth after the split?

 

Which of the following financial statements that we studied can be thought of as a statement of ownership and/or a statement of risk?