Question

1. ABC Inc. has 10 million shares of common stock outstanding. The firm also has 1,200,000 shares of 6 percent preferred stock (annual dividend=$6) and 300,000 semi-annual bonds of $1,000 face value with a coupon rate of 8 percent semiannual bonds outstanding. The bonds were issued five years ago with maturity of 30 years when they were issued. The market price of common stock is $46 per share and has a beta of 0.85, the preferred stock currently sells for $90 per share, and the bonds sell for 108 percent of par. The market risk premium is 7.5 percent and T-bills yield 4 percent. The firm pays taxes at 21 percent. What is the WACC for the firm? (2 points)

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2. You want to build a portfolio with a beta of 1.12. Right now you have invested $10,000 in Stock K with a beta of 0.95 and $6,500 in Stock L with a beta of 1.35. You have another $3,500 to invest and you want to divide this amount between Stock M with a beta of 1.62 and a risk-free asset. How much should be invested in the risk-free asset to achieve a portfolio beta of 1.12? (2 points)

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3. You purchased a bond with the face value of $1,000 and an annual coupon rate of 7.2 percent last year for $862.5. Currently, the bonds are selling for $825.25. If the inflation rate last year was 1.9% percent, what is your exact real rate of return on this investment? (2 points)

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4. You want to buy a car from ABC Inc. The cost of the car is $29,900. The sales tax, destination charges, plate & registration will add 9.5% to the cost of the car. You will finance   the entire amount for 60 months at an APR of 3.9% with the first payment due immediately. What are your monthly payments? (2 points)

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5. Firm A is considering a merger with Firm B. The current market value of A is $20,000,000 and the volatility of asset return is 58% percent. A also has a zero coupon bond with a face value of $8,000,000 that matures in 3 years. B’s market value is $9,000,000 with standard deviation of asset return of 70% and a zero coupon bond of $3,000,000 that matures in 3 years. The continuously compounded risk free rate is 4%. After the merger the combined company will have asset volatility of 48%. What are the current market values of debt and equity for A, B, and the combined firm? You need to compute 6 values (1 for D and 1 for E for the three firms: A, B, and (A+B). (3 points)

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6. ABC owns a machine and looking to sell it in 1 year. The machine costs $10,000,000 currently. The price of the machine has a historical volatility of 12%. A buyer is interested in entering into a contract to have the option to buy the machine in one year for $10,000,000. If the risk-free rate is 6% compounded continuously, what is the value of the option contract? (3 points)

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Answer 1

Apologies but I am allowed only one question

ABC owns a machine and looking to sell it in 1 year. The machine costs $10,000,000 currently. The price of the machine has a historical volatility of 12%. A buyer is interested in entering into a contract to have the option to buy the machine in one year for $10,000,000. If the risk-free rate is 6% compounded continuously, what is the value of the option contract? (3 points)

Answer: Value of option contract is 812484.2860