Management Engineering - Finance Lab + Corporate FInance

Full exam

Exercise 1 Insana Inc. is willing to collect debt capital in order to open a commercial branch in Sicily. To this extent, 200 bonds will be placed on the market. The nominal value (par value) of each bond is equal to € 100,000, and is paid back at the expiration. The emission pr ice is 100. The bonds pay an annual coupon equal to 6%. The expiration is equal to 5 years. Some months later, i.e. 4 months after the issue, the bonds are traded on the market. Their clean price is equal to 100.56. Determine: 1. The accrued interest and the dirty price , in that moment 2. The average spread of the yield compared to risk -free bonds: the latter in that moment offer an annual return equal to 1% (for maturities up to 3 years), 2% (for maturities larger than 3 years) 3. Duration and yield -to-maturity 4. Th e amount of the capital collected 4 months before , at the issue on the primary market 5. The maximum value of the interest rate on debt that an investor should be available to pay in order to build an arbitrage portfolio, borrowing money and buying the bonds 6. The value of the tax saving generated by the debt issue, that Insana Inc. might enjoy each year (assuming that the tax rate on corporate income is equal to 25%) Draw a graph describing (approximately) the value of the duration of the bond, as time goes by, up to maturity. Exercise 2 The current market value of company Patruk’s assets is equal to € 2 million. The two shareholders, Andrew and Albert , are examining an interesting investment. They estimate that, investing € 100,000 today, the project could lead to an increase in the cash flows (defined as revenues net of operating cash costs) equal to € 25,000 for the first 4 years of activity, and € 4 0,000 for further 4 years. If the project was financed with no debt, the annual cost of capital would be equal to 13%. The terminal value of the project (net of taxes) is equal to € 30,000. The tax rate on corporate income is equal to 40%. The managers are willing to fund the project partially with debt, keeping the ratio L between debt and value of the project constant, equal to 50%. The annual interest rate paid on debt is equal to 8%. Moreover the lending bank charges a one -shot fee, € 1,500 for commissi ons, immediately. Determine: a) The weighted average cost of capital for the project, and the expected return for shareholders b) The net present value of the project, if it is financed only with equity capital c) The net present value of the project, if it is fina nced also with debt, as before described d) The value of the debt each year, and the tax saving offered by interests Exercise 3 Angelica Holding is investing into a new project, related to the supply of vegan food. The value of the project today is equa l to € 20 million. After two years, the value of the project could be € 35 million (in the case that vegan food will be appreciated by the market ) or € 7 million (if the business will suffer). Managers expect to reach the break -even of profits no earlier than 3 years. The annual rate of return of risk -free bonds is equal to 1.5%, while the cost of equity capital is equal to 13%. Compute: 1. The value of a forward contract, delivery 2 years, for the sale of the project at the predetermined price of € 30 million 2. The value of a put option on the project, time to maturity 2 years, strike price € 10 million 3. The value of the corresponding call option 4. The changes in the answer given to 1. assuming that the management of the project requires annual costs for operations equal to € 500,000 The company is worried about the recent turmoil of the price of soy on the market. Soy is a fundamental r aw material in the supply chain of vegan food . One yea r ago the market price was € 7 per kilo , today is € 10 per kilo. T he annual volatility is equal to 28%. Compute: 5. The forward price of soy , delivery time 1 year 6. The value of a European call option on soy, strike price € 11 per kilo, time to maturity 1 year 7. The value of the corresponding American call option Academic year 20 18-201 9 The test must be completed in 120 minutes . Write immediately surname and name on papers provided by the staff. During the test you cannot read personal notes or books. If – to your opinion – the text is not clear, or is ambiguous, you can introduce proper assumptions. Corporate Finance (Prof. G. Giudici) Written test – July 22nd 20 19