Valuation Principle Problems  

Question 1: Suppose that Bondi Inc. is a holding company that owns both Pizza Hut and Kentucky Fried Chicken Franchised Restaurants. If the value of Bondi is $130 million, and the Pizza Hut Franchises are worth $70 million, then what is the value of the Kentucky Fried Chicken Franchises?  

Question 2. An independent film maker is considering producing a new movie. The initial cost for making this movie will be $20 million today. Once the movie is completed, in one year, the movie will be sold to a major studio for $25 million. Suppose the fair interest rate is 10% calculate the NPV.  

Question 3. Assume that rather than paying for the $20 million investment entirely using its own cash, the film maker is considering raising additional funds by issuing a security that will pay investors $11 million in one year. Again the fair interest rate is 10%. What is the NPV?  

Question 4. An exchange traded fund (ETF) is a security that represents a portfolio of individual stocks. Assume that if you buy an ETF you can sell the individual stocks in the market. Consider an ETF for which each share of the ETF represents a portfolio of two shares of International Business Machines (IBM), three shares of Merck (MRK), and three shares of Citigroup Inc. (C). Suppose the current market price of each individual stock are shown below:  

Stock Current Price 

IBM     $121.57 

MRK     $36.59 

C         $3.15  

Calculate the fair price per share of the ETF in a normal market (ignore transaction costs).  

Question 5. Suppose that the ETF is trading for $365; what transactions should you make to earn an arbitrage profit? Calculate the arbitrage profit available.  

Question 6. Suppose that the ETF is trading for $360; what transactions should you make to earn an arbitrage profit? Calculate the arbitrage profit available.