Ask Question, Ask an Expert


Ask Basic Finance Expert

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?


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 what is the difference between the assignment of a

1. What is the difference between the assignment of a take-out commitment to the construction lender and a triparty agreement? If neither device is used in project financing, what is the relationship between lenders in s ...

Write a cover letter for your questionnaireprepare a cover

Write a cover letter for your questionnaire. Prepare a cover letter to introduce the questionnaire prepared for Exercise. The letter should encourage readers to complete the questionnaire and return it quickly in the sta ...

1 describe the basic problem that threatens internal

1. Describe the basic problem that threatens internal validity for nonequivalent group designs. 2. Give an example of a between-subjects nonexperimental design and a between subjects quasi-experimental design. Explain wh ...

What is the difference between shareholder and stakeholder

What is the difference between shareholder and stakeholder value? What is social responsibility? How does it, if at all, contribute to shareholder and stakeholder value? Does it add value to the firm? If so, how and unde ...

1 why do adjustable rate mortgages arms seem to be a more

1. Why do adjustable rate mortgages (ARMs) seem to be a more suitable alternative for mortgage lending than PLAMs? 2. List each of the main terms likely to be negotiated in an ARM. What does pricing an ARM using these te ...

1 what are some of the physical considerations that a

1. What are some of the physical considerations that a developer should be concerned with when purchasing land? How should such considerations be taken into account when determining the price that should be paid? 2. What ...

1 suppose you withdraw 1000 from your checking account and

1. Suppose you withdraw $1,000 from your checking account and use the funds to buy a certificate of deposit at your bank. How will these actions affect M1 and M2? Why aren't credit cards included in M1 or M2? 2. In a rep ...

Net present value kingston inc management is considering

Net present value: Kingston, Inc. management is considering purchasing a new machine at a cost of $6,137,270. They expect this equipment to produce cash flows of $814,322, $663,275, $637,250, $1,817,112, $1,292,960, and ...

Focus on analysis yum brands inclearning objective 4

Focus on Analysis | Yum! Brands, Inc. (Learning Objective 4: Analyze f inancial statements) Refer to the Yum! Brands, Inc.'s financial statements in Appendix B at the end of the book. Suppose you are an investor consider ...

1 what is a capital market2 why do companies use capital

1. What is a capital market? 2. Why do companies use capital markets to finance growth, new products, R&D, etc.? Would it be better just to keep profits and reinvest them in the company? 3. Discuss the basics of how the ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

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.

Ask Now Help with Problems, Get a Best Answer

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