A123456789101112131415161718192021222324252627282930313233343536 B C D E Name_______________________________________Final ExaminationFINC 5880Session 9Question 1. 10 points) Both Cameron and Daley are large public corporations with subsidiaries throughout theworld. Cameron uses a centralized approach and makes most of the decisions for its subsidiaries. Daley uses adecentralized approach and its subsidiaries make many of their own decisions.a. Would the agency problem be more pronounced for Cameron or for Daley? Explain. b. Would agency costs likely be higher for Cameron or for Daley? Why? c. Discuss a major advantage and a major disadvantage to a centralized approach such as Cameron uses. d. Discuss a major advantage and a major disadvantage to a decentralized approach such as Daley uses. e. Which is better, a centralized or decentralized approach? Explain. F1 23456with subsidiaries7 throughout thens for its subsidiaries. Daley uses a8s.9? Explain.101112131415161718oach such as Cameron uses.19202122proach such as23Daley uses.24252627282930313233343536 G Name_______________________________________Final ExaminationFINC 5880Session 9 Question 2. (20 points) TRANE Corporation plans to raise $4million to pay off its existing short-term bank loan of $1.2 mincrease total assets by $2,800,000. The bank loan bears an interest rate of 11 percent. The company’s president owns2,000,000 shares of common stock and wishes to maintain control of the company. The company’s tax rate is 30 perceninformation is shown below. The company is considering two alternatives to raise the $4 million: (1) sell common stock at $10 per share, or (2) Sell bcoupon, each $1,000 bond carrying 50 warrants to buy common stock at $15 per share. Current Balance Sheet Total Assets $3,200,000 – a. Show the new balance sheet under both alternatives. For Alternatives 2, show the balance sheet after exercise of th b. Calculate the president’s ownership position for both alternatives. He doesn’t buy any of the additional shares. c. Calculate earnings per share for both alternatives, assuming that EBIT is 12% of total assets. d. Calculate the debt ratio under both alternatives e. Which alternative do you recommend and why? amination5880 sion 9 existing short-term bank loan of $1.2 million and toercent. The company’s president owns 65 % of theny. The company’s tax rate is 30 percent. Balance sheet mon stock at $10 per share, or (2) Sell bonds at a 12%share. Current LiabilitiesCommon Stock, Par $1Retained earningsTotal claims $1,500,0001,000,000700,000$3,200,000 w the balance sheet after exercise of the warrants. ‘t buy any of the additional shares. of total assets. Name_______________________________________Final ExaminationFINC 5880Session 9 Question 3. (15 points) Mantra Corporation is interested in acquiring Corlos Corporation. Corlos has 20 million sharesand a target capital structure consisting of 40 percent debt and 60 percent equity. The debt interest rate is 9%. Assumfree rate of interest is 2% and the market risk premium is 10%. Corlos’ free cash flow (FCF0) is $8 million per year and is expected to grow at a constant rate of 5% a year; its beta is 1.$8 million in debt. The tax rate for both companies is 35%. a. Calculate the required rate of return on equity using equation: rs= rRF + RPM(b) b. Calculate weighted average cost of capital, using equation: WACC = Wdrd(1-%) + wsrs c. Calculate the value of operations, using equation: Vops = FCF0(1+g)/WACC – g) Vops = FCF0(1+g)/(WACC – g) = d. Calculate the value of the company’s equity, using equation: Vs = Vops – debt e. Calculate the current value of the company’s stock. nation 80 n9 Corporation. Corlos has 20 million shares outstandingquity. The debt interest rate is 9%. Assume that the risk- t a constant rate of 5% a year; its beta is 1.2. Corlos has Name_______________________________________Final ExaminationFINC 5880Session 9 Question 4. (20 points) A Treasury bond futures contract settles at 103’16.a. Calculate the present value of one futures contract in dollars? b. Are current market interest rates higher or lower than the standardized rate on a futures contract? Explain. c. Calculate the implied annual interest rate on the futures contract. d. Calculate the new value of the futures contract if interest rates increase by 1 percentage pointannually. e. Describe differences between forward and futures contracts? Illustrate, using a specific example, of howcompanies could use either a futures or forward contract to hedge a position. es contract? Explain. ge point c example, of how Name_______________________________________Final ExaminationFINC 5880Session 9 Question 5. (20 points) Kemper Company’s balance sheet and income statement are shown below (in millions of doand its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the $5 preferred wilshare of $1.00 preferred with a par value of $25 plus one 9% subordinated income debenture with a par value of $7issue will be retired with cash. The company’s tax rate is 30 percent. Current AssetsNet fixed assets Balance Sheet prior to Reorganization (in millions400450 Total assets 850 a. Construct the pro forma balance sheet after reorganization takes place. Show the new preferred at its par value. b. Construct the pro forma income statement after reorganization takes place. How does the recapitalization affect nestockholders? Income Statement (in millions)Prior to ReorganizationNet sales900.0Operating expense725.0Net operating income175.0Other income7.0 EBTTaxesNet incomeDividends on $5 PSDividends on $8 PSIncome to Common SHs 182.054.6127.45.0122.4 30% Increased income available to common SHs with reorganization: c. Calculate the required pre-tax earnings to cover debt and preferred stock obligations, before and after the recapita d. Calculate the debt ratio before and after the reorganization? e. Would the common stockholders be in favor of the reorganization? Explain your answer, providing at least 2 reasons Final ExaminationFINC 5880Session 9 eet and income statement are shown below (in millions of dollars). The companyzation plan. In this plan, each share of the $5 preferred will be exchanged for one9% subordinated income debenture with a par value of $75. The $9 preferreds 30 percent. Sheet prior to Reorganization (in millionsCurrent liabilitiesAdvance payments$5 preferred stock, $100 par value (1,000,000) shares$9 preferred stock, no par, callable at 100 (160,000 shares)Common stock, $0.10 par value (10,000,000) sharesRetained earningsTotal claims tion takes place. Show the new preferred at its par value. 350201003050300850 anization takes place. How does the recapitalization affect net income available to common e Statement (in millions)After Reorganization and preferred stock obligations, before and after the recapitalization? ganization? Explain your answer, providing at least 2 reasons for it. Name_______________________________________Final ExaminationFINC 5880Session 9 Question 6. (15 points) Stock A has an expected return of 10% and a standard deviation of 30%. StockB has an expected return of 13% and a standard deviation of 45%. The correlation coefficientbetween Stocks A and B is 0.25. Stock A has a beta of .85 and Stock B has a beta of 1.20. Portfolio isinvested 40% in Stock A and 60% in Stock B. a. Calculate the expected return of the portfolio. b. Calculate the standard deviation of the portfolio. c. Calculate the beta of the portfolio d. Is the portfolio likely to do better or worse than average when the stock market is going down?