Company of choice for section c is Snapchat Inc.Ticker: SNAP
Finance 3000 Mini-Cases Kunjal Patel U = 25 b. Bond Valuation 1. Compute the value of a $1000, 1-year, zero coupon bond if investors require a yield to maturity of 0.08%U R = 0.08 * 25 = 2% PV (redemption) = cash flow / (1+ R) ^N = $1000 / (1 + 0.02)^1 = $ 980.39 2. Compute the value of a bond with a typical $1000 par value, a coupon rate of 2.25% with semi-annual payments, and a 10-year maturity if investors required a yield to maturity of 2.25% on the bond (or 9U basis points, where 1 basis point=0.01%). PV = 1.125 * PVAF (0.0225,20) + 1000 * PVIF (0.0225,20) = [1.125 ]+ [1000 * (1.0225)^20] = [ 1.125 * 25.47] + [ 1000 * 1.56 ] = 28.65 + 1560 = $ 1,588.65 3. Compute the value of the bond in Q.2 if investors suddenly required a yield to maturity of 1% on the bond (or 4U basis points, where 1 basis point=0.01%). 4. Compute the value of the bond in Q.2 if investors suddenly required a yield to maturity of 7.5% on the bond (or 30U basis points, where 1 basis point=0.01%). 5. Compute the value of a bond with a typical $1000 par value, a coupon rate of 2.25% with semi-annual payments, and a 30-year maturity if investors required a yield to maturity of 2.25% on the bond (or 9U basis points). PV = 1.125 * PVAF (0.0225,20) + 1000 * PVIF (0.0225,20) = [1.125 ]+ [1000 * (1.0225)^30] = [ 1.125 * 43.14] + [ 1000 * 1.95] = 48.53 + 1950 = $ 1,998.53 6. Compute the value of the bond in Q.5 if investors suddenly required a yield to maturity of 7.5% on the bond (or 30U basis points). 7. Compute the value of the bond in Q.6 if there is a change of 48 basis points in the required yield due to a fall in the default risk of the debtor (where 1 basis point=0.01%, so the change is 0.48%) 8. Compute the value of the bond in Q.6 if the bond is callable (without a make-whole call feature) and there is a change of 36 basis points in the required yield due to a rise in the chance of the debtor prepaying the principal of the bond (where 1 basis point=0.01%, so the change is 0.36%) 9. Compute the value of a bond that is identical to the bond in Q.6 except that it is convertible into common stock at a fixed conversion ratio and therefore has a required yield to maturity that is 0.28% different from that in b.6 (i.e., different by 28 basis points). 10. Compute the value of a municipal bond that has characteristics identical to the bond in Q.6 (including the same credit rating and default risk) and has a required yield to maturity that is 0.12% different from that in b.6 (i.e., different by 12 basis points). 11. Compute the annual expected inflation rate (forecasted by the consensus investor in the market) over the next 10 years by using the real interest rate which is quoted as the yield on Treasury Inflation Protected Securities (TIPS) at https://www.bloomberg.com/markets/rates-bonds/government-bonds/us Expected Inflation = Treasure Yield – TIPS Yield = 1.55% - (-0.98%) = 2.53% 12. Compute the required yield on a 30-year bond that has a spread above Treasury rates of 0.5% using data from the https://www.bloomberg.com/markets/rates-bonds/government-bonds/us 13. Compute the annual change in the Japanese Yen over the next 10 years if the Yen earns 0.25% more than the market expectation of the change in the Yen using the websites https://www.bloomberg.com/markets/rates-bonds/government-bonds/us and https://www.bloomberg.com/markets/rates-bonds/government-bonds/japan websites 14. Compute the yield to maturity on a bond with a $1000 par value, a coupon rate of 3.75% with semi-annual payments, and a 13-year maturity if the price is $829.21 15. Explain whether a company would have to pay a higher or lower coupon rate on a new bond issue (sold at par value) that has indenture terms mandating the posting of collateral, seniority of the claim of the lender in bankruptcy, and protective covenants (compared to a bond without such terms). The company will be paying lower coupon rate on a new bond issue that has indenture terms mandating the posting of collateral, seniority of the claim of the lender in bankruptcy, and protective covenants because it will in the favor of bondholder as lower rate will have lower risk factors which would result in lower risk premium and that’s what most investor would prefer. 16. Compute how much interest a company would pay in 2023 on a 10-year, $100,025 dollar loan (which it takes out today) that has an interest rate contractually set to equal 2.75% above the 1-year Treasury bond yield on June 15 each year if that specified T-bond rate turns out to be 14.42% on June 15, 2023. c. Expected Returns, Financial Risk, and Diversification 1. Computing the Expected Return on your Company's Stock (Google search “ticker symbol” for your company to get your company's ticker symbol): Get the stock beta from finance.yahoo.com (enter your company ticker symbol in the “Quote Lookup” on the upper right, and the beta will appear on the upper left in the second column) and compute the expected return on that equity using the CAPM. For the risk-free rate, use the 30-year Treasury bond yield, which is listed every moment as GT30:Gov at https://www.bloomberg.com/markets/rates-bonds/government-bonds/us A market risk premium of 5% (based on survey estimates and historical averages) may be utilized. SNAP Beta = 1.26; CAPM= 2. Compute how much of the expected return on your stock computed in c.1 is from capital gains (show the expected percentage capital gain or the expected dollar appreciation on your stock). 3. If markets are efficient, explain whether actual returns on your stock can be higher or lower next year than the current expected return you computed in c.1. 4. If the return on your stock equals the expected return indicated by the CAPM next year (as computed in c.1) and then suffers a return of negative 60% in the subsequent year, what is the geometric average return on the stock over those two years (i.e., the compounded annual return)? 5. If the market portfolio unexpectedly goes down 30%, what return would likely occur on your stock? 6. Explain how much of the risk of loss that is indicated in c.5 can be diversified away. 7. Explain how a shareholder can, without knowing the future, diversify away the risk of your company's stock potentially suffering a return that unexpectedly turns out to be 50% less than the return computed in c.1. 8. What return do you expect on a portfolio next year that is currently invested 30% in your stock (with an expected return as computed in c.1) and 70% in another stock that has a CAPM expected return of 11%?