July23rd2018

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Exercise 1 Marmitte&Scodelle SpA (M&S) is willing to raise money for new investments and is planning to issue a bond, with maturity 4 years, coupon paid each year. The total par value of the bonds will be equal to € 50 million (the company wants to rais e money for the same amount). A credit rating agency issued the rating for the debt (BB). Th e risk free interest rate on the market is equal to 0.7%. Compute: 1. The annual coupon that the company should pay (s ee the Table for spread values) 2. The duration of the bond 3. The volatility of the bond price 4. The coupon that the company could have decided, if it was paid each quarter, instead of each year Assume that after the issuance, 4 months later, the risk free rate on the market goes up to 1.2% while the.bond rating is the same as before. Compute: 5. The theoretical clean and dirty prices of the bo nd on the market 6. The yield to maturity (YTM) Exercise 2 Francesco is planning to start an entrepreneurial a ctivity in the healthcare business, in Dallas. The initial investment in R&D activity and equipment is equal to $ 1 million. Operating cash flows, gross of takes, are as follow s: $ - 0.5 million (time 1), $ 1 million (time 2), $ 3 million (time 3 ), $ 2 million (time 4). The corporate tax rate on operating cash flows in Texas is equal to 18%. The unlevered cost of equity capital for this risky project is equal to 20%. Compute: 1. The net present value of the project in the base case (financed only with equity capital) 2. The net present value if the project is financed a time 0 also with a bank loan ($ 0.6 million, to be paid back at time 4; annual interest rate on debt 8%) 3. The net present value if the project is financed a time 0 also with a bank loan ($ 0.75 million, to be paid back at time 1 (25% of the…