Management Engineering - Finance Lab + Corporate FInance

Full exam

Exercise 1 (10,5 points) On the Milan exchange we find the following bonds, denominated in Euro: • IT48: rated A, coupon 1% paid annually, maturity 28 months • IT31: rated BBB, annual coupon 2% paid every 6 months (i.e. 1% every semester), maturity 14 months • IT90: rated BB, zero coupon bond, maturity 8 months The principal is paid back at maturity in all cases. The interest rate term structure is rather flat (the annual risk-free interest rate is equal to 0.7% for maturities up to 12 months and 1% for maturities from 13 months to 30 months). Currently, this is the spread that the market in the Euro area is requesting for different rating notches, compared to risk-free securities: Rating AA A BBB BB B CCC Annual spread +0.3% +0.6% +1.8% +2.2% +2.9% +4.5% Compute: 1. The equilibrium dirty price and eventually the clean price for the bonds 2. The yield to maturity (YTM) 3. The duration and expected volatility Explain which could have been the effects of the issuance of the aforementioned bonds on the issuers’ asset value. On the market we find also another bond (IT55) which is denominated in US$ and is not risk-free. Maturity is 8 months, annual coupon 2%. The clean price is 100.235. Explain which of the following parameters can or cannot be computed starting from the information available (and why): dirty price, YTM, duration, rating and spread requested by the market. Exercise 2 (10 points) Plenilune will soon be listed on the stock exchange. Financial analysts think that the profitability of the company in the future will be described by the metrics below: Year 1 Year 2 Year 3 Year 4 and thereafter Return on equity (ROE) ROE 1=10% ROE 2=8% ROE 3=12% ROE LT=12% Payout ratio (PR) PR 1=70% PR 2=70% PR 3=80% PR LT=90% The return on equity is the ratio between the net profit during the year and the book value of the equity capital at the beginning of the year. The equity capital is made up by 100 million shares and the book value per shares is today € 0.85. The annual cost of equity capital k E estimated by analysts is equal to 9%. Compute: 1. The expected dividends in the short run (and the growth rate in the long run) 2. The theoretical market value of the shares 3. The present value of growth opportunity (PVGO) 4. The expected market capitalization of the company Warren Pizzett agrees on all expectations above, with one exception: the long term ROE LT… he is more optimistic. In fact he evaluates the shares € 1.338 each. What is his expectation on ROE LT? Exercise 3 (10,5 points) Due to the war in Ukraine, the price of sunflower oil on the market is at the historical record level (see the Graph). Today the price is US$ 2400 per metric ton. The annual volatility of the price is 25%. The annual risk free rate in the Euro area is 1.2% and in the USA is 1.5%. The spot exchange rate is 1 Euro = 1.05 US$. Compute: 1. The forward price of sunflower oil, at 1 year 2. The value of a forward contract to buy sunflower oil at 1 year, delivery price US$ 2000 per metric ton 3. How do the previous answers change if we consider that there is a cost of carry on sunflower oil equal to US$ 20 per metric ton per semester 4. The value of a European call option on sunflower oil, strike price US$ 2000, time to delivery 1 year (do not consider the costs of carry) 5. The value of the corresponding European put option Discuss which type of manufacturing company could be interested in taking a hedging position with call options (and which one on put options). A company is interested to sign a term contract with a broker according to which both the parties agree to trade the sunflower oil at 1 year, with a delivery price decided today, but in Euro, not in US$. Are you able to compute the delivery price according to which the value of the contract today is zero? (=there is no need for a compensation at time zero). Academic year 20 21-20 22 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 – June 13th 20 22