Spring 2021 Final Exam XXXXXXXXXXFIN 200 Problem 1 (20 Points) A bond is maturing in 7 years and paying annual coupons of 5% If the annual required rate of return is 4%, compute: 1. The PV of the...

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Spring 2021
Final Exam
                 XXXXXXXXXXFIN 200
Problem 1 (20 Points)
A bond is maturing in 7 years and paying annual coupons of 5%
If the annual required rate of return is 4%, compute:
1. The PV of the bonds;
2. The duration of the bond;
3. The modified duration (volatility);
4. Interpret your result in question 3.
Problem 2 (20 Points)
You have the following bond maturing in 4 years:
Face Value = 1.000$;
Semiannual dividends = 35$;
Annual Interest rate= 5%
1. Compute the PV of the cash flows?
2. What will happen to the bond price if the interest rate decreases to 6%?
3. What will be the price if the annual interest is 4%?
Problem 3 (30 Points)
Valuation of companies can be done by forecasting a series of cash flows and then estimating a horizon value.
Your firm projects net cash flow in years 1 through 5 as follows:
    Year 1
    Year 2
    Year 3
    Year 4
    Year 5
    
100 Million $
    
120 Million $
    
135 Million $
    
140 Million $
    
147 Million $
Assume that the company is expecting a growth rate of 6% starting year 5 and a discount rate of 12%; compute the PV of the company?
Show the details of all your calculations.
Problem 4 (30 Points)
Compute the pay back, discounted pay back, NPV and IRR of the following projects;
Assume a discount rate of 10%
    
    C0
    C1
    C2
    C3
    
Project A
    -2000
    500
    500
    5000
    
Project B
    -2000
    500
    1800
    0
    
Project C
    -2000
    1800
    500
    0

             XXXXXXXXXXSpring 2021
XXXXXXXXXXFinal Exam
                         FIN 350
Use your own words to answer the exam questions in order to demonstrate your understanding of the course material.
Problem 1
A retiree strongly believe that investing in a non-dividend paying growth firm will eventually cause him to lose all his shares.
Explain why and how this happens?
Problem 2
Managers are reluctant to make dividend changes. Why ?
Problem 3
High dividend policy is more difficult to manage for a weak firm than a strong firm. Explain in details why?
Problem 4
The company has the following simplified Balance Sheet
Asset value XXXXXXXXXX XXXXXXXXXXDebt XXXXXXXXXX
                     XXXXXXXXXXEquity 750
Total XXXXXXXXXX1250 XXXXXXXXXX1250
The cost of debt is 6% and the cost of equity is 12%
Compute the company’s WACC ?
Problem 5
Rio is a company specialized in producing healthcare products.
Its free cash flows in millions are expected to be as follow:
    Year 1
    Year 2
    Year 2
    Year 4
    Year 5
    Year 6
    3.5
    3.2
    3.4
    5.9
    6.1
    6.0
Cash flows will settle down starting year 6 and will record a growth of 3% per year.
Assume a WACC of 9%.
1. Compute the horizon value at year 6 ?
2. Compute the present value of the company?
2. If the market value of debt is $36 million, compute the total value of equity?
Answered Same DayMay 19, 2021FIN350Charles Sturt University

Solution

Akshay Kumar answered on May 19 2021
48 Votes
Problem 1
    Given
    Par Value    1000
    Annual Coupon    Coupon Rate*Par Value    5%*1000    50
    Number of Years    7
    Required Rate of Return    4%
    1. PV of Bond
    Years    Amount (Coupon/Par Value    Discounting Factors @ 4%    PV
    1    50    0.96    48.08
    2    50    0.92    46.23
    3    50    0.89    44.45
    4    50    0.85    42.74
    5    50    0.82    41.10
    6    50    0.79    39.52
    7    50    0.76    38.00
    7    1000    0.76    759.92
    Total            1,060.02
    Thus, PV of Bond is 1060.02
    2. Duration of Bonds         1
    Years    Amount (Coupon/Par Value)    Discounting Factors @ 4%    PV    Weight PV
    1    50    0.96    48.08    48.08
    2    50    0.92    46.23    92.46
    3    50    0.89    44.45    133.35
    4    50    0.85    42.74    170.96
    5    50    0.82    41.10    205.48
    6    50    0.79    39.52    237.09
    7    50    0.76    38.00    265.97
    7    1000    0.76    759.92    5,319.42
    Total            1,060.02    6,472.81
    Duration of Bonds    Weighted PV / PV
        6472.81/1060.02
        6.11
    Duration of Bonds is 6.11 years
    3. The modified duration (volatility)    Duration of Bonds/(1+r)
        6.11/(1+4%)
        5.88
    The modified duration (volatility) is 5.88 years
    4. Interpret your result in question 3
    Modified duration helps in measuring the sensitivity of price of bond with respect to change in YTM of Bond.
    Change In price of Bond =-Modified Duration *Change in YTM*Price
Problem 2
    Given
    Face Value    1.000$;
    Semiannual dividends    35$;
    Annual Interest rate    5%
    Number of Years    4
    Number of Periods    4*2    8
    Semiannual...
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