Lucy has $900,000 to invest and she wants a portfolio beta of

Lucy has $900,000 to invest and she wants a portfolio beta of 1.2. The S&P 500 has an expected return of 18% and the standard deviation is 30%. The risk-free return is 5%. She plans to put her money in the S&P 500 and T-bills. What is the expected return (in %) and standard deviation of her portfolio?

The town of South Park is planning a bond issue in six months and

The town of South Park is planning a bond issue in six months and Kenny, the town treasurer, is worried that interest rates may rise, thereby reducing the value of the bond issue. Should Kenny buy or sell Treasury bond futures contracts to hedge the impending bond issue? Remember to complete all parts of the question and support your answers with examples from the text and other resources.

Otobai Company in Osaka, Japan is considering the introduction of

Otobai Company in Osaka, Japan is considering the introduction of an electrically powered motor scooter for city use. The scooter project requires an initial investment of ¥15 billion. The cost of capital was assumed to be 10%. The initial investment can be depreciated on a straight-line basis over the 10-year period, and profits are taxed at a rate of 50%.,,Consider the following estimates for the scooter project.,Market Size 1.1 million,Market Share 0.1,Unit Price ¥ 400,000.0 ,Unit Variable Cost ¥ 360,000.0 ,Fixed Cost ¥ 2.0 billion ,,What is the NPV of the electric scooter project? (Negative amount should be indicated by a minus sign. Enter your answer in billions. Do not round intermediate calculations. Round your answer to 2 decimal places.),, Net present value ¥ ______________ billion ,

19-3 Maese Industries Inc. has warrants outstanding that permit

19-3 Maese Industries Inc. has warrants outstanding that permit the holders to purchase 1 share of stock per warrant at a price of $28.50., a. Calculate the exercise value of the firm’s warrants if the common sells at each of the following prices: (1) $20, (2) $25, (3) $30, (4) $100. (Hint: A warrant’s exercise value is the difference between the stock price and the purchase price specified by the warrant if the warrant were to be exercised.), b. Assume the firm’s stock now sells for $20 per share. The company wants to sell some 20-year, $1,000 par value bonds with interest paid annually. Each bond will have attached 50 warrants, each exercisable into 1 share of stock at an exercise price of $28.50. The firm’s straight bonds yield 11%. Assume that each warrant will have a market value of $3 when the stock sells at $20. What coupon interest rate, and dollar coupon, must the company set on the bonds with warrants if they are to clear the market? (Hint: The convertible bond should have an initial price of $1,000.),19-4 The Tsetsekos Company was planning to finance an expansion. The principal executives of the company all agreed that an industrial company such as theirs should finance growth by means of common stock rather than by debt. However, they felt that the current $42 per share price of the company’s common stock did not reflect its true worth, so they decided to sell a convertible security. They considered a convertible debenture but feared the burden of fixed interest charges if the common stock did not rise enough in price to make conversion attractive. They decided on an issue of convertible preferred stock, which would pay a dividend of $2.10 per share., a. The conversion ratio will be 1.0; that is, each share of convertible preferred can be converted into a single share of common. Therefore, the convertible’s par value (and also the issue price) will be equal to the conversion price, which in turn will be determined as a premium (i.e., the percentage by which the conversion price exceeds the stock price) over the current market price of the common stock. What will the conversion price be if it is set at a 18% premium? At a 23% premium?, b. Should the preferred stock include a call provision? Why?,19-5 Fifteen years ago, Roop Industries sold $400 million of convertible bonds. The bonds had a 40-year maturity, a 5.75% coupon rate, and paid interest annually. They were sold at their $1,000 par value. The conversion price was set at $55.00, and the common stock price was $55 per share. The bonds were subordinated debentures and were given an A rating; straight nonconvertible debentures of the same quality yielded about 8.75% at the time Roop’s bonds were issued., a. Calculate the premium on the bonds—that is, the percentage excess of the conversion price over the stock price at the time of issue., b. What is Roop’s annual before-tax interest savings on the convertible issue versus a straight-debt issue?, c. At the time the bonds were issued, what was the value per bond of the conversion feature?, d. Suppose the price of Roop’s common stock fell from $55 on the day the bonds were issued to $45.00 now, 15 years after the issue date (also assume the stock price never exceeded $55.00). Assume interest rates remained constant. What is the current price of the straight-bond portion of the convertible bond? What is the current value if a bondholder converts a bond? Do you think it is likely that the bonds will be converted?, e. The bonds originally sold for $1,000. If interest rates on A-rated bonds had remained constant at 8.75% and if the stock price had fallen to $45.00, then what do you think would have happened to the price of the convertible bonds? (Assume no change in the standard deviation of stock returns.), f. Now suppose that the price of Roop’s common stock had fallen from $55 on the day the bonds were issued to $45.00 at present, 15 years after the issue. Suppose also that the interest rate on similar straight debt had fallen from 8.75% to 7.75%. Under these conditions, what is the current price of the straight-bond portion of the convertible bond? What is the current value if a bondholder converts a bond? What do you think would have happened to the price of the bonds?,19-7 Niendorf Incorporated needs to raise $35 million to construct production facilities for a new type of USB memory device. The firm’s straight nonconvertible debentures currently yield 10%. Its stock sells for $27 per share, has an expected constant growth rate of 5%, and has an expected dividend yield of 6%, for a total expected return on equity of 12%. Investment bankers have tentatively proposed that the firm raise the $25 million by issuing convertible debentures. These convertibles would have a $1,000 par value, carry a coupon rate of 8%, have a 20-year maturity, and be convertible into 35 shares of stock. Coupon payments would be made annually. The bonds would be noncallable for 5 years, after which they would be callable at a price of $1,075; this call price would decline by $5 per year in Year 6 and each year thereafter. For simplicity, assume that the bonds may be called or converted only at the end of a year, immediately after the coupon and dividend payments. Also assume that management would call eligible bonds if the conversion value exceeded 20% of par value (not 20% of call price)., a. At what year do you expect the bonds will be forced into conversion with a call? What is the bond’s value in conversion when it is converted at this time? What is the cash flow to the bondholder when it is converted at this time? (Hint: The cash flow includes the conversion value and the coupon payment, because the conversion occurs immediately after the coupon is paid.), b. What is the expected rate of return (i.e., the before-tax component cost) on the proposed convertible issue?,

Cosmogonic Petroleum’s Chairman, Yukon Cornelius, has been

Cosmogonic Petroleum’s Chairman, Yukon Cornelius, has been attempting to increase the efficiency of his firm’s oil exploration process. Currently, the firm classifies areas as ‘promising’ and ‘not promising’. The firm has exploration rights in 300 ‘promising’ areas and 100 ‘not promising’ areas. The firm begins exploring an area by sending out a grizzled prospector to sniff around the area (at a cost of $250,000). Depending on the prospector’s report, the firm reclassifies the area as ‘highly likely’ or ‘highly unlikely’. The probability of the prospector classifying an area as ‘highly likely’ is 0.9 if the area was earlier classified as promising and 0.5 if it was earlier classified as ‘not promising’. If the firm goes on to dig a well (at a cost of $1,000,000), oil is found in a ‘highly likely’ area with probability 0.8, and in a ‘highly unlikely’ area with probability 0.1. If oil is found, an average well contributes a profit of $500,000 a year and has a life of 6 years (assume these cash flows occur at the end of the year). If oil is not found, the company is left with a million-dollar hole in the ground in the middle of the desert. This asset is worth zero. The required rate of return is 20% for the oil exploration business.,,(i) Show that the probability that there is actually oil in a promising area is 0.73, and 0.45 for the not promising area. If you fail in this step, continue on and use these figures for the parts (ii) and (iii).,,(ii) Assuming that prospecting and drilling take no time, what is the optimal oil exploration strategy for the firm (that is, where should it prospect, and when should it drill)?,,(iii) The firm now has the option of investing $20 million in developing a new seismic test which will increase the informativeness of the prospecting. The new test will determine for certain if an area has oil or no oil. While the new test will cost only $100,000, it will render the grizzled prospector obsolete. The $50 million in training costs invested in the old prospector (after all, it takes a lot to grizzle a prospector) will now be lost. Also the new technology will require a special laboratory, which, because of space constraints, will have to be built on the executive parking lot. An air-conditioned tramway from the worker’s parking lot will have to be arranged for the executives which will necessitate an expenditure of $ 10 million. Should the firm develop the new test (assume that the test will be available a year from now if the project is given the go ahead, and all areas can be tested simultaneously with either test)?