+1-415-315-9853

info@mywordsolution.com

## Finance

 Basic Finance Corporate Finance Financial Management Financial Econometrics Portfolio Management Risk Management Public Finance Business Law & Ethics

1. Stone Container is a foremost producer of cardboard boxes. Stone Container has \$10M in outstanding equity. In addition, it has \$2M in outstanding debt. The debt is a ten-year mortgage and is rated AAA. This is low risk debt. \$2M is both the book as well as market value of the debt. In addition to its cardboard box production and sales facilities, Stone Container also has a portfolio of 3 month government T-bills¹. These are at present worth \$3M. The market price of risk (e.g. E [rm- rf]) is 8.5 percent.

a) Stone Container's debt has a β of 0.20. The equity β was estimated using the following equation:

StoneContainer s equity - risk free = 0.0+1.4(Stock market return-rrisk free) + ε

Compute the β which measures of the risk of Stone Container's assets.

b) Stone Container is considering expanding its ability by 15 percent. It will do this by building a latest production facility. It will also enlarge its sales force by 15% to market the additional cardboard boxes. This project will need an investment of\$2M. The firm will liquidate part of its T-bill portfolio to pay for investment. Since Stone Container will lose the 3 percent yield on the bonds, should 3 percent be the discount rate it uses for evaluating its capacity expansion? Elucidate briefly.

c) An alternative method for deriving a discount rate is to use the Capital Asset Pricing Model. What discount rate for the capacity expansion investment does CAPMsuggest?

2. Petroleo Brasileiro (PBR) has just issued 1M one year bonds. Each bond has a face value of1, 000 Reais. Owners of the bonds are entitled to receive \$R 1000 back at the end of the year with 80 of interest. The bonds were sold for par which means each bond was sold for \$R 1,000 or a price which is equivalent to face value.

a) What is the coupon rate on the bond? What is the promised rate on bond?

b) The current one year risk free rate is 5% and the market price of risk is 8.5. If the return on the bond is uncorrelated with the return on the market, what is the anticipated return on bond? Hint: If the return on the bond is uncorrelated with the market, what does this imply about the β of the bond?

c) Petroleo Brasileiro bonds are risky in the sense they could default. If the market is supposing that investors will get only 750 for each bond they own if the bonds default, what does the market think is the probability that the bonds will default.

Hint: - how is the probability of default related to the anticipated return on the bonds?

Notes:

1 - T-bills are short term obligations of US government. In this case, short term means maturities of less than one year. Consider T-bills to be a risk-free bond.
2 - It might help to think about what Stone Container’s balance sheet looks like.

Basic Finance, Finance

• Category:- Basic Finance
• Reference No.:- M91291

Have any Question?

## Related Questions in Basic Finance

### 1 demonstrate your understanding of the relationship

1. Demonstrate your understanding of the relationship between logistical capabilities and competencies by tracing the evolution of logistical work to universal competencies. Does this logic have any practical application ...

### 1 explain what a case study is discuss the limitations of

1. Explain what a case study is. Discuss the limitations of case studies for the study of human behavior. 2. What is systematic observation, and what techniques are used to make observations systematic? 3. What kinds of ...

### 1 what is the main advantage of the typical optimization

1. What is the main advantage of the typical optimization technique in comparison to simulation? 2. At what point in the typical analysis does the technique give way to the managerial review and evaluation process? 3. Co ...

### Figure 942 is one depth-first presentation of the ow graph

Figure 9.42 is one depth-first presentation of the ow graph of Fig. 9.38. How many other depth-first presentations of this ow graph are there? Remember, order of children matters in distinguishing depth-first presentatio ...

### The fine garments company sells fashion clothing the

The Fine Garments Company sells fashion clothing. The forecasted annual demand for their premium leather jacket is 2,000. The order-processing cost per order is \$40, and the inventory holding cost is \$35/item/year. How m ...

### How do you explain the highly politicized nature of share

How do you explain the highly politicized nature of share issue privatization (SIP) pricing and share allocation policies? Are governments maximizing offering proceeds, or are they pursuing primarily political and econom ...

Download this transmittal from the CMS website and prepare an education presentation. Include the importance of the Medical Conditions List, how the list should be used, and any precautions that ambulance suppliers shoul ...

### Createnbspa 1050-word report and include the

Create  a 1,050-word report, and include the following: Explain the relationship between risk and return Identify an example of risk and return.  Explain which is more risky bonds or common stocks. Explain how understand ...

### 1 how has the community development block grant served to

1. How has the Community Development Block Grant served to help communities perform local mitigation? 2. Why do some people consider insurance to not be a proper mitigation method? 3. Why are structural controls a contro ...

### Use secondary sources to write a report about female

Use secondary sources to write a report about female leaders in business. 2020 Women on Boards is an organization dedicated to raising the percentage of women on corporate boards to at least 20% by the year 2020. As part ...

• 13,132 Experts

## Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

### Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

### Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

### Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

### Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro

### Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen