Question 1. (15 points) Kern Corporation entered into an agreement with its investment banker to
sell 10 million shares of the company’s stock with Kern netting $210 million dollars from the
offering. The expected price to the public was $25 per share.
The out-of-pocket expenses incurred by the investment banker were $2,000,000.
a. What profit or loss would the investment banker incur if the issue were sold to the public at an
average price of $25 per share?

b. What profit or loss would the investment banker incur if the issue were sold to the public at
an average price of $20 per share?

c. Is the agreement between the company and its investment banker an example of a
negotiated or a best-efforts deal? Why? Which is riskier to the company? Why?

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G

Final Examination
FINC 5880
Week 9
Question 2. (20 points) Tundra Corporation is interested in acquiring Tantrell Corporation. Tantrell has 2 million shares
outstanding and a target capital structure consisting of 40 percent debt. The debt interest rate is 8 percent. Assume that the
risk-free rate of interest is 3 percent and the market risk premium is 7 percent.
Tantrell’s free cash flow (FCF0) is $3 million per year and is expected to grow at a constant rate of 6 percent a year; its beta is
1.2. Tantrell has $5 million in debt. The tax rate for both companies is 30 percent.

20 a. Calculate the required rate of return on equity using equation: r s= rRF + RPM(b)
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27 b. Calculate weighted average cost of capital, using equation: WACC = W drd(1-%) + wsrs
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39 c. Calculate the value of operations, using equation: V ops = FCF0(1+g)/WACC – g)
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45 d. Calculate the value of the company’s equity, using equation: Vs = Vops – debt
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52 e. Calculate the current value of the company’s stock, using equation:
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Price per share = Vs/shares outstanding

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Final Examination
FINC 5880
Week 9

1

Question 3. (20 points) Corizon Company’s balance sheet and income statement are shown below (in millions of dollars).
Corizon and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the $5 preferred will be
exchanged for one share of $2.00 preferred with a par value of $50 plus one 10 percent subordinated income debenture with a
par value of $50. The $8 preferred issue will be retired with cash. The company’s tax rate is 30 percent.

Current Assets
Net fixed assets

Total assets

Current
175.0
183.0

358.0

Current liabilities
Advance payments
$5 preferred stock, $100 par value (1,000,000) shares
$8 preferred stock, no par, callable at 100 (80,000 shares)
Common stock, $1.00 par value (5,000,000) shares
Retained earnings
Total claims

Current
150.0
10.0
100.0
8.0
5.0
85.0
358.0

Income Statement
Net sales
Operating expense
Net operating income
Other income
EBT
Taxes
Net income
Dividends on $5 PS
Dividends on $8 PS
Income to Common SHs

Current
600.0
550.0
50.0
10.0
60.0
18.0
42.0
5.0
0.6
36.4

a. Construct the pro forma balance sheet after reorganization takes place. Show the new preferred at its par value.

b. Construct the pro forma income statement after reorganization takes place. How does the recapitalization affect net income
available to common stockholders?

c.

What are the required pre-tax earnings before and after the recapitalization?

d. Calculate the debt ratio before and after the reorganization?

e. Would the common stockholders be in favor of the reorganization? Why or why not?

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Final Examination
FINC 5880
Week 9

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Question 4. (15 points) A Treasury bond futures contract settles at 95-8.
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a. Calculate the present value of the futures contract?
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30 c. Calculate the implied annual interest rate on the futures contract
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e. Why do companies enter into futures contracts? Provide a specific example.
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Final Examination
FINC 5880
Week 9

Question 5. (15 points) Your portfolio is diversified . It has an expected return of 10.0% and a
beta of 1.10. You want to add 200 shares of Tundra Corporation at $30 a share to your portfolio.
Tundra has an expected return of 14.0% and a beta of 1.50. The total value of the investor’s
current portfolio is $18,000.
a. Calculate the expected return on the portfolio after the purchase of the Tundra stock?

b. Calculate the expected beta on the portfolio after you add the new stock?

c. Is your portfolio less risky or more risky than average? Explain.

d. Will your portfolio likely outperform or underperform the market in a period when
stocks are rapidly falling in value?

e. Is beta always an accurate predictor of a portfolio’s performance? Explain?

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Final Examination
FINC 5880
Week 9
Question 6. (15 points) Marcal Corporation is considering foreign direct investment in Asia. The company estimates that the project
would require an initial investment of $14 million. and generate positive cash flows of $2 million a year at the end of each of the next
20 years. The project’s cost of capital is 12%.
a. Calculate the project’s NPV.

b. The company thinks there is a 50-50 chance that the Asian country will impose restrictions on the company in one year. If the
restrictions are imposed, cash flows will be $1,000,000 per year for 20 years. If restrictions are not imposed, cash flows will be
$3,000,000 per year for 20 years. In either case, the cost will remain at $14,000,000. If the company waits one year, what is the project’s
NPV with restrictions and without restrictions.

c. Calculate the value of the option if the company waits one year. Should the company wait or go ahead with the project now?

d. Discuss 2-3 factors other than the value of the real option that the company should consider in making its decision.

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