Question 1
To qualify as official development assistance (ODA), development loans must have a grant element of at least 25 percent, calculated using a stated annual interest rate of 10 percent. Consider the following loan:
$100 million, to be amortized over 8 years by 16 semi-annual payments, after a grace period of 4 years during which only interest would be paid semi-annually. The first world country would charge interest at a stated annual rate of 6 percent. Determine whether or not this loan would qualify as ODA. What is the maximum interest rate the first world country could charge for this loan to qualify as ODA?
Question 2
Risk and Return
a) Consider the following investment alternatives.
|
State of Economy
|
Probability
|
Investment A
|
Investment B
|
|
Bust
|
5%
|
-20.00%
|
20.00%
|
|
Below average
|
25%
|
-5%
|
5%
|
|
Average
|
30%
|
10%
|
6%
|
|
Above average
|
30%
|
20%
|
-3%
|
|
Boom
|
10%
|
40%
|
-10%
|
|
Total
|
100%
|
|
|
Which of these investments moves with the economy?
Calculate the expected rate of return and standard deviation on each alternative. Identify which investment offers better expected returns and which offers higher risk.
Determine the covariance and correlation between investment A and B
Assume a two-stock portfolio with $30,000 in investment A and $70,000 in investment B. What is the portfolio expected rate of return and standard deviation?
b) The following is a scenario for three stocks constructed by Professor Wiseman's students:
|
|
|
|
Scenario Return
|
|
|
Stock
|
Price
|
Recession
|
Average
|
Boom
|
|
A
|
$10
|
-15%
|
20%
|
30%
|
|
B
|
$15
|
25%
|
10%
|
-10%
|
|
C
|
$50
|
12%
|
15%
|
12%
|
Construct an arbitrage portfolio using these stocks.
Question 3
Bond Refunding
With Canadian interest rates at historical lows, McGraw-Hill Ryerson (MHR) is considering whether to refund an old issue of $30 million, 12 percent coupon (paid yearly) 20-year bonds that were sold 5 years ago. A new issue of $30 million, 15-year bonds can be sold with a coupon rate of 9 percent (paid yearly).
A call premium of 10 percent will be required to retire the old bonds and floatation costs of $2 million will apply to the new issue. The marginal tax rate applicable is 50 percent and MHR expects that there will be a one month overlap during which any funds can be invested in t-bills yielding 8 percent. Should MHR refund?
Question 4
Canadian Tradition/APT
4a.The following table provides values of sensitivities and expected returns for portfolios of U, V and W. Suppose portfolio returns can be described by a 2-factor model with intercept (3 factors including intercept), and the weights have to be greater than or equal to 0. Determine the equation that describes the equilibrium returns for the following portfolios.
|
Portfolio
|
OH
|
13i2
|
Expected Return r/o)
|
|
U
|
0.5
|
0.6
|
12.5
|
|
V
|
0.8
|
1.2
|
15.7
|
|
W
|
1.6
|
1.5
|
20.2
|
4b. Assume there is a portfolio X with βX1= 1.2. What is the equilibrium return on portfolio X? What is the sensitivity of portfolio X to factor 2 βX2? What is the relationship of portfolio X to factor 2?
4c. Suppose there is another portfolio Y with the following characteristics: Actual Return 18.5 %; βY1= 1.35 and βY2= 0.95. Would you recommend investment in portfolio Y? Why?
Question 5
Financial Planning
Consider the following income statement and balance sheet for the WINTER Corporation:
WINTER CORPORATION
Income Statement
Sales $70,000
Costs $20,000
Interest expense $7,000
Taxable income $43,000
Taxes (34%) $14,620
Net income $28,380
Dividends $20,000
Addition to retained earnings $8,380
WINTER CORPORATION
Balance Sheet
Assets Liabilities and Owners' Equity
Percentage of Percentage of
Sales Sales
Current assets Current liabilities
Cash $ 6,000 Accounts payable $ 5,000
Accounts $ 10,000 Notes payable $ 6,000
receivable
Inventory $ 7,000 Total $ 11,000
Total $23,000 Long-term debt $ 24,000
Fixed assets Owners' equity
Net plant and $35,000 Common stock and paid- $ 15,000
equipment in surplus
Retained earnings $ 8,000
Total assets $58,000 Total $ 23,000
Total liabilities and $ 58,000
owners' equity
Assume costs vary with sales and the dividend payout ratio is constant. What is the projected addition to retained earnings?
Assume that all assets and accounts payable vary with sales, whereas notes payable, interest expense and LT debt do not.
Prepare a pro forma income statement balance sheet showing EFN, assuming a 50 percent increase in sales, no new external debt or equity financing. The plant is operationg at full capacity.
Question 6
Capital Budgeting
PTP Inc. projects unit sales for a new opera tenor emulation implant as follows:
|
Year
|
Sales
|
|
1
|
109,000
|
|
2
|
123,000
|
|
3
|
135,000
|
|
4
|
156,000
|
|
5
|
95,500
|
Production of the implants will require $800,000 net working capital to start and additional net working capital of investments each year equal to 40 percent of the projected sales increase for the following year.
(Because sales are expected to fall in 5 year, there is no NWC cash flow occurring for year 4.) Total fixed costs are $192,000 per year, variable production costs are $295 per unit, and unit are priced at $395 each. The equipment needed to begin production has an installed cost of $19.5 million. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus falls in to the class 8 for tax purpose (20 percent). In the five years, this equipment can be sold for about 30% of its acquisition cost. PTP is in the 40% marginal tax bracket and has a required return on all its projects of 23%. Based on these preliminary project estimates, what is the NPV of the project? What is IRR?