I need Q2, Q3, Q4, and Q5 completed.
Q1 Name_Adam Oliver_____________________________________ Final Examination FINC 5880 Session 9 Question 1. 10 points). Explain how each of the following affects corporate governance and whether the impact is positive or negative. a. Block ownership Block ownership impacts corporate governance by givig a large block of company's shares to an individual or an institution. Block owners can have great amounts of influence over managerial decision making in a company because of their high amount of shareholder voting power. Any form of blockholder with a high stake in a company will generally monitor the company's management and is usually active in critical company decisions. This impact could be either positive or negative. On one hand, there is another voice that could bring a good perspective, but on the other hand the block owner could have a negative influence on the company because there is such a high amount of decision making power that rests with a single investor. b. Greenmail Greenmail is when a financial institution or individual buys enough shares in a company to threaten a hostile takeover so that the target company will instead repurchase it's shares at a premium. A company will generally respond defensively to greenmail in order to prevent a hostile takeover. By buying back their own shares, a company will reduce their risk for takeover, but this is generally viewed as an unfavorable option as there are other things that most companies would prefer to do with their capital. c. Stock options as part of compensation These are forms of compensation paid to employees (generally upper management) as part of their payment packages. This type of compensation generally vests over a period of time, and ensures that those in management do their best to increase the stock price of a company. If the stock goes up, the employee stock options become worth more. This is definitely a positive impact on a company, because it motivates employees to work in a way that drive share price higher. d. High level of debt With both corporate and personal finance, it can be difficult to justify high levels of debt. If the amount of debt that a company carries is high, it could give power to their creditors and allow those creditors to have decision rights over a company. A creditor is generally only going to allow safe investments and projects because they want to ensure that the company is able to pay back their debt. This is a risk the creditor has taken and they will always act out of their own self interest and attempt to make sure that the company is swayed in a direction that allows them to be paid back above all else. This is an unfavorable situation to be in for any company. e. Board of Directors comprised by majority of outsiders and compensation based in part on performance of company. This will have a positive impact because outsiders are generally going to be much more independent than someone who has a large financial interest in the company. This type of governance helps to promote impartial decision making, and board member compensation can be tied to stock price (like a stock option) to ensure that the best decisions possible are made on behalf of the company. Q2 Name______________________________________ Final Examination FINC 5880 Session 9 Current Balance Sheet Current Liabilities$900,000 Common Stock, Par $0.251,000,000 Retained earnings700,000 Total Assets$2,600,000 Total claims$2,600,000 Alternative 1: Common stock$10FACTSAlternative 1: Common stock # new shares200,000Tax rate 20%# new shares Par value per share$0.25New financing$2,000,000Par value per share Existing Loan$600,000 Alternative 2: Debentures Interest rate10%Alternative 2: Debentures Exercise price per warrant$15Interest amount - old$60,000Exercise price per warrant # bonds to raise new capital2,000Interest amount - new$200,000# bonds to raise 2M # new shares100,000# new shares warrants per bond50President owns51.5%warrants per bond New money raised1,500,000Shares outstanding4,000,000New money raised Addition to par25,000Addition to par Additional paid-in capital1,475,000Additional paid-in capital d. Calculate the debt ratio under both alternatives e. Which alternative do you recommend and why? Question 2. (20 points) Reuth Corporation plans to raise $2 million to pay off its existing short-term bank loan of $600,000 and to increase total assets by $1,400,000. The bank loan bears an interest rate of 10 percent. The company's president owns 51.5% percent of the 4,000,000 shares of common stock and wishes to maintain control of the company. The company's tax rate is 20 percent. Balance sheet information is shown below. The company is considering two alternatives to raise the $2 million: (1) sell common stock at $10 per share, or (2) Sell bonds at a 10 percent coupon, each $1,000 bond carrying 50 warrants to buy common stock at $15 per share. a. Show the new balance sheet under both alternatives. For Alternatives 2, show the balance sheet after exercise of the warrants. c. Calculate earnings per share for both alternatives, assuming that EBIT is 11% of total assets. b. Calculate the president's ownership position for both alternatives. He doesn't buy any of the additional shares. Q3 Name______________________________________ Final Examination FINC 5880 Session 9 Unlevered cost of equity11% Growth rate after Year 34%Year 1Year 2Year 3 Free Cash Flow450750805 a. Calculate the expected free cash flow for Year 4. What might cause the free cash flow to be lower? b. Calculate the horizon value of the unlevered operations. c. Calculate the total value of unlevered operations at Year 0. Question 3. (15 points). Talcon Corporation has a 11% unlevered cost of equity. The company forecasts the free cash flows shown below. The cash flows are expected to grow at a constant rate of 4% rate after Year 3. Q4 Name______________________________________ Final Examination FINC 5880 Session 9 Futures Prices: Treasury Bonds--$100,000; Pts. 32nds of 100% Delivery MonthOpenHighLowSettleChangeOpen Interest (1)(2)(3)(4)(5)(6)(7) Dec103'14103'14102'11102'17-6678,000 Mar102'11102'23100'28101'01-5135,855 June101'14101'2699'3299'08-517,255 b. a. (1) Calculate the implied yield on the futures contract? (2) How many futures contracts will be needed to hedge potential losses in bond proceeds (based on current market conditions) due to waiting (round up to the nearest integer)? (3) Calculate the total value of the hedge position. b. Interest rates in general increase by 200 basis points The bond's terms don't change and that the coupon rate is still 10%. (1) Calculate the amount of proceeds be given the new market rates? (2) Calculate the loss in proceeds based on the original target for proceeds?? c. Assume that the company had entered the hedge found in part a. (1) Calculate the new price of the hedge position? (2) Calculate the gain on the hedge? (3) Calculate the net effect of the loss of proceeds and the gain on the hedge? d. Is this problem an example of a perfect hedge or a cross hedge? Is it an example of speculation or hedging? Why? Question 4. (20 points) The Aleander Company plans to issue $10,000,000 of 10-year bonds at par next June, with semiannual interest payments. The company's current cost of debt is 10 percent. However, the firm's financial manager is concerned that interest rates will increase in coming months, and has decided to take a short position in U. S. government t-bond futures. See the settlement data below for t-bond futures. (Note: One standard futures contract is $100,000) Q5 Name______________________________________ Final Examination FINC 5880 Session 9 Sale of current assets2,100,000 Sale of fixed assets5,000,000 Trustee costs500,000 BeforeBefore DefaultBalance SheetDefault Current Assets3,000,000Accounts payable465,000 Net fixed assets 7,600,000Accrued taxes80,000 Accrued wages95,000 Notes payable60,000 Total current liabilities700,000 First-mortgage bonds2,000,000 Second-mortgage bonds3,500,000 Subordinated debentures4,500,000 Common stock200,000 Retained earnings(300,000) Total assets10,600,000Total claims10,600,000 a. How much will SHs receive? b. How much will mortgage bondholders receive? c. How much will priority creditors receive? Question 5. (20 points) Pontrain Imports will be liquidated. Its current balance sheet is shown below. Current assets are sold for $2,100,000 and fixed assets are sold for $5,000,000. All fixed assets are pledged as collateral for all mortgage bonds. Subordinated debentures are subordinate only to notes payable. Trustee costs are $500,000. d. Identify the remaining general creditors. How much will each receive before subordination adjustment and after adjustment? Q6 Name______________________________________ Final Examination FINC 5880 Session 9 Stock A: expected return12% Stock A: standard deviation40% Stock B: expected return14% Stock B: standard deviation60% Correlation between A and B0.35 Stock A beta0.90 Stock B beta1.20 % portfolio in Stock A45% % portfolio in Stock B55% a. Calculate the expected return of the portfolio. Expected Return13.100% b. Calculate the standard deviation of the portfolio. Standard Deviation42.76% c. Calculate the beta of the portfolio Beta1.0650 d. Does the portfolio have more risk, less risk, or the same risk as the market? Explain. The portfolio has more risk than the market. The market beta would normally be 1, and the portfolio has a greater beta than 1, meaning the risk is higher. e. Will your portfolio likely outperform, underperform, or perform the same as the market in a period when stocks are rapidly falling in value? Why? If t he stock market is rapidly falling, our portfolio and it's higher beta, mean that it will be more volatile than the overall market and as such it will fall more in a rapid market deterioration scenario. Question 6. (15 points) A portfolio consists of Stock Aand Stock B. Data for the 2 stocks is shown below.