AFC2140 S1 2012 Final Exam (Solutions)

Question 1
a) coupon rate = yield to maturity = 6%
60
1 1000
= 625.56
P=
1
+

0.15 1.15 7 1.15 7

b) The 30 year zero coupon bond - higher interest rate risk
c) (i) V = 3 (1-0.08)/0.15-(-0.08) = $11.95
(ii) Refer to lecture discussions
Question 2
(a) (i) NPV = -95,000 +18000/0.1 = $85,000
(ii) NPV = 0, 18000/IRR = 95,000
IRR = 0.1895
(iii) NPV > 0, Accept , IRR > k , Accept
(b) Discuss the reinvestment assumptions of both methods.
Question 3
Yr 0

Yrs 1-10 (pa.)

Additional NR
Savings in OpEx
EBITDA
D&A
EBIT
(1-t)

500,000
300,000
800,000
-205,000
595,000
0.7

NOPAT

416,500

D&A
CFO
CapEx
FCF

205,000
621,500
-2,050,000
-2,050,000

621,500

NPV = -2,050,000+ 621,500/0.15*(1-1/1.15^10) = 1,069,164.70

NPV >0, should accept

Question 4
Expected payoff (at t=1) = 0.6 (15/0.12) + 0.4 (105)= 117 miilion
NPV (at t=0) = -180m + 117m/1.12 = -75.5357 million
do not proceed
Question 5
(a)
(i) average mark = 0.2 * 80% + 0.6 * 66% + 0.2 * 55% = 66.6%.
(ii) variance of marks = 0.2*(66.6 80)2 + 0.6*(66.6-66)2 + 0.2*(66.6-55)2 =
= 35.91 + 0.22 + 26.91 = 63.04
Hence standard deviation of marks = 7.94%.
(b)
between 51.04% and 82.16%.
(c ) discussions surrounding diversification and risks
(d ) discussions surrounding diversification and risks
Question 6
(a) (i) Expected return
A

12%

7%

0.5

(ii)
Required return on Asset A = 9.5%; under-priced
Required return on Asset B = 12%; fairly priced

1.5

beta

Required return on Asset A = 14.5%; over priced

(iii) as above in the sketch.
(b) Refer to lecture discussions
(c) Refer to lecture discussions
Question 7
(a) Cost of equity = 10%.
(b) Market value of ABC = $100,000/0.1 = $1,000,000
(c) The market price of a share in ABC = $1,000,000/1,000,000 = $1
(d) debt = $1,000,000 = $500,000;
equity = $1,000,000 = $500,000.
(e) new beta = 1.0 * 2 = 2.0
(f) new cost of equity = 5% + 2 * 5% = 15%
(g) new value of Company ABC = [$100,000 - $500,000*0.05]/0.15 = $500,000.
(h) They are consistent.
Question 8
Refer to lecture discussions

Question 9
(a) g = 2.4
share price = DIV1/(r-g) = DIV0*(1+g)/(r-g)
= $1.16*1.024/(0.084 0.024) = $19.80
(b) You get to keep $1.16*(1-0.4)/(1-0.7) = $0.994
(c )

Refer to lecture discussions