Cadangan Soalan Maf 620 – Corporate Finance
PEP. AKHIR SEMESTER 2009
CADANGAN SOALAN MAF 620 – CORPORATE FINANCE
Question 1
Consider the following information about two securities:
State of Economy Probability Return on Lotek (%) Return on Hitek (%) Recession 0.2 10 50 Normal 0.5 15 20 Expansion 0.3 25 –10
REQUIRED:
a. Determine the expected return and standard deviation of each security. (8 marks)
b. Suppose you could invest in only one security. Which would you select, Lotek or Hitek? Why? (2 marks)
c. If the correlation between the returns of Lotek and Hitek is – 0.01, calculate the expected return and standard deviation of a portfolio with 90% invested in Lotek and the balance in Hitek.
(6 marks)
d. “The most important factor which determines a portfolio’s expected return and its standard deviation is the expected returns and standard deviations of the individual securities in the portfolio”. Do you agree?
(4 marks)
(Total : 20 marks)
Question 2
A. Tenat Corp. Bhd is near financial collapse due to accumulated losses in recent years. The firm expects to remain in business for one more year. It is considering between two mutually exclusive projects, whichever chosen will be the only activity for the year. Managers expect equal likelihood of a boom or bust year. Tenat is obligated to pay bondholders RM400,000 at the year end. Ignore taxes and discounting.
The information about the two projects are as follows:
Project A Project B
Economic state Boom Bust Boom Bust
Probability 0.5 0.5 0.5 0.5
Payoff from Project RM600,000 RM400,000 RM700,000 RM100,000
REQUIRED:
i. Calculate for the firm, the company value, and its equity and debt values if Project A is chosen. (4 marks)
ii. Calculate for the firm, the company value, and its equity and debt values if Project B is chosen. (4 marks)
iii. Which project
CADANGAN SOALAN MAF 620 – CORPORATE FINANCE
Question 1
Consider the following information about two securities:
State of Economy Probability Return on Lotek (%) Return on Hitek (%) Recession 0.2 10 50 Normal 0.5 15 20 Expansion 0.3 25 –10
REQUIRED:
a. Determine the expected return and standard deviation of each security. (8 marks)
b. Suppose you could invest in only one security. Which would you select, Lotek or Hitek? Why? (2 marks)
c. If the correlation between the returns of Lotek and Hitek is – 0.01, calculate the expected return and standard deviation of a portfolio with 90% invested in Lotek and the balance in Hitek.
(6 marks)
d. “The most important factor which determines a portfolio’s expected return and its standard deviation is the expected returns and standard deviations of the individual securities in the portfolio”. Do you agree?
(4 marks)
(Total : 20 marks)
Question 2
A. Tenat Corp. Bhd is near financial collapse due to accumulated losses in recent years. The firm expects to remain in business for one more year. It is considering between two mutually exclusive projects, whichever chosen will be the only activity for the year. Managers expect equal likelihood of a boom or bust year. Tenat is obligated to pay bondholders RM400,000 at the year end. Ignore taxes and discounting.
The information about the two projects are as follows:
Project A Project B
Economic state Boom Bust Boom Bust
Probability 0.5 0.5 0.5 0.5
Payoff from Project RM600,000 RM400,000 RM700,000 RM100,000
REQUIRED:
i. Calculate for the firm, the company value, and its equity and debt values if Project A is chosen. (4 marks)
ii. Calculate for the firm, the company value, and its equity and debt values if Project B is chosen. (4 marks)
iii. Which project