Download Phd Economics, Siena - Finance – Final exam (16 April 2014

Phd Economics, Siena - Finance – Final exam (16 April 2014)
1. Compute the value of a portfolio composed by 1) a coupon bond with annual
coupon of 6% and principal of 5,000 Euros; 2) a perpetuity with annual cash flow
of 500 Euros. Both cash-flows are risk-free, and the risk free interest rate is 6%.
How would you change the pricing of the portfolio in the case in which you
introduce default risk?
2. Compute the price of a lottery paying a prize of 1,000 Euros in case of Italian
default (and zero otherwise), if you know that 1) risk-free interest rate is 5%; 2)
the probability of Italian default is 20%; 3) the stock TIM.IT guarantees a return of
40% in case of non-default and -60% in case of default.
3. A restaurant chain wants to open a new restaurant in Siena, and it has two
options:
1) a restaurant in Piazza del Campo, initial cost 2.5mln, expected cash-flows of
200,000 Euros per year;
2) a restaurant at Fontebecci, initial cost of 0.5mln with expected cash-flows
200,000 Euros per year (with probability 60%) or 40,000 Euros per year (with
probability 40%). If the risk-free rate is 5%, which opportunity will the chain take?
(The answer should depend on the risk premium.....)
4. A CFO of a firm with debt-to-equity ratio equal to 9 and total value of 240mln
decides to buy back 48mln of debt to be financed with new stock issuance
Compute the new debt-to-equity ratio, and the change on the expected return on
equity, assuming that the return on debt is 6% and the WACC of the company is
12%.