Problem 10-21 Cost-Cutting Proposals [LO2]

Explain how each of the following affects corporate governance and whether the impact is positive or negative.

1. Block ownership

2. Greenmail

3. Stock options as part of compensation

4. High level of debt

5. Board of Directors comprised by majority of outsiders and compensation based in part on performance of company.

Shares of XYZ stock (which does not pay dividends) are trading at $460. The prices of European options on XYZ with 1 year to expiry are as follows: Strike Call Put 440 83.99 59.26 445 81.67 61.89 450 79.40 64.56 455 77.18 67.30 460 75.02 70.08 465 72.92 72.92 470 70.86 75.81 475 68.86 78.76 480 66.90 81.75

(a) What is the one-year forward price of XYZ?

(b) What is the riskless rate of interest?

(c) You become convinced that XYZ’s price will end up between 450 and 470 in a year’s time, and decide to put on a trade that pays you $100,000 if XYZ’s share price is between 450 and 470, and nothing if XYZ’s share price is less than 445 or more than 475. Draw the payoff diagram. (In the payoff diagram, join these payoffs by straight lines between 445 and 450, and between 470 and 475.) How much does it cost you to enter this position? If you wanted to do a zero-cost trade with the same profit diagram, how much would you stand to lose if you were wrong, and XYZ ended up above 475 or below 445?

Lourdes Corporation's 15% coupon rate, semiannual payment, $1,000 par value bonds, which mature in 30 years, are callable 3 years from today at $1,025. They sell at a price of $1,245.45, and the yield curve is flat. Assume that interest rates are expected to remain at their current level.

1. What is the best estimate of these bonds' remaining life? Round your answer to the nearest whole number.

     years

2. If Lourdes plans to raise additional capital and wants to use debt financing, what coupon rate would it have to set in order to issue new bonds at par?
   1. Since the bonds are selling at a premium, the coupon rate should be set at the going rate, which is the YTM.
   2. Since Lourdes wishes to issue new bonds at par value, the coupon rate should be set the same as that on the existing bonds.
   3. Since Lourdes wishes to issue new bonds at par value, the coupon rate should be set the same as the current yield on the existing bonds.
   4. Since interest rates have risen since the bond was first issued, the coupon rate should be set at a rate above the current coupon rate.
   5. Since the bonds are selling at a premium, the coupon rate should be set at the going rate, which is the YTC.

A two-month European put option on a non-dividend-paying stock is currently selling for $2.00. The stock price is $52, the strike price is $55, and the risk-free interest rate is 5% per annum. What opportunities are there for an arbitrageur?

what are the definitions of these financial ratios?
1. Quick Ratio
2. Current Ratio
3. Average Inventory Ratio Average Accounts Receivable Ratio

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a rate of 7%. The probability distribution of the risky funds is as follows:

The correlation between the fund returns is 0.12.

You require that your portfolio yield an expected return of 13%, and that it be efficient, on the best feasible CAL.

a. What is the standard deviation of your portfolio? (Round your answer to 2 decimal places.

b. What is the proportion invested in the T-bill fund and each of the two risky funds? (Round your answers to 2 decimal places.)

T-bill fund-?

Stocks-?

Bonds-?

Renegade Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2.92 million and will last for six years. Variable costs are 32% of sales, and fixed costs are $2,033,463 per year. Machine B costs $5.05 million and will last for nine years. Variable costs for this machine are 21% of sales and fixed costs are $1,281,839 per year. The sales for each machine will be $10.2 million per year. The required return is 11 %, and the tax rate is 38%. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis.

Calculate the NPV for machine A. (Round answer to 2 decimal places. Do not round intermediate calculations)

Topic: Capital Budgeting Problem

Renegade Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2.9 million and will last for six years. Variable costs are 31% of sales, and fixed costs are $2,004,327 per year. Machine B costs $4.89 million and will last for nine years. Variable costs for this machine are 22% of sales and fixed costs are $1,280,117 per year. The sales for each machine will be $9.3 million per year. The required return is 9 %, and the tax rate is 38%. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis.

Calculate the EAC for machine A. (Round answer to 2 decimal places. Do not round intermediate calculations)

Topic: Capital Budgeting Problem

Renegade Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2.88 million and will last for six years. Variable costs are 33% of sales, and fixed costs are $1,967,572 per year. Machine B costs $5.15 million and will last for nine years. Variable costs for this machine are 20% of sales and fixed costs are $1,392,870 per year. The sales for each machine will be $10.2 million per year. The required return is 9 %, and the tax rate is 38%. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis.

Calculate the EAC for machine B. (Round answer to 2 decimal places. Do not round intermediate calculations)

Topic: Capital Budgeting Problem

Compute the fair value of a chooser option which expires after n = 10n=10 periods. At expiration the owner of the chooser gets to choose (at no cost) a European call option or a European put option. The call and put each have strike K = 100K=100 and they mature 5 periods later, i.e. at n = 15n=15

Instructions: Quiz Instructions: Option Pricing in the Multi-Period Binomial Questions 1-8 should be answered by building a 15-period binomial model whose parameters should be calibrated to a Black-Scholes geometric Brownian motion model with: T = .25T=.25 years, S_{0} = 100S 0 ​ =100, r = 2\%r=2%, \sigma = 30\%σ=30% and a dividend yield of c = 1\%.c=1%. Hint Your binomial model should use a value of u = 1.0395...u=1.0395.... (This has been rounded to four decimal places but you should not do any rounding in your spreadsheet calculations.) Submission Guidelines Round all your answers to 2 decimal places. So if you compute a price of 12.9876 you should submit an answer of 12.99.

Renegade Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2.96 million and will last for six years. Variable costs are 34% of sales, and fixed costs are $2,061,224 per year. Machine B costs $5.12 million and will last for nine years. Variable costs for this machine are 21% of sales and fixed costs are $1,400,231 per year. The sales for each machine will be $9.6 million per year. The required return is 12 %, and the tax rate is 38%. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis.

Calculate the NPV for machine B. (Round answer to 2 decimal places. Do not round intermediate calculations)

Topic: Capital Budgeting Problem

1. Net Present Value (NPV) and Internal Rate of Return (IRR) (question)

The City and County of Denver is completing a $45 million renovation of City Park Golf Course. To complete the renovation, the course has been closed to the public for 2.5 years (planned re-opening is Spring 2020). The project updated the course, built a new clubhouse that can accommodate golf and community events, resulted in a “net gain of 500 trees”, and reduced flood risk “for thousands of homes”.[1] All of these updates are expected to provide either increased revenue or reduced costs. Assume the $45 million cost was paid upfront by Denver and the following are the estimated cash receipts and disbursements associated with the project.[1] If the cost of capital is 6%, does the project make sense based on NPV and IRR over a 30-year useful life? Does your finding change if the cost of capital is actually 4%?

[