Question 1. (4 points)
Calculate the expected return and the standarddeviation (=risk) for the stockportflio given
below.
Portfolios Expected Standard- Correlation between the stocks
Stock hare return deviation Stock 1 Stock 2 Stock 3
Stock 1 40 % 15 % 20 % 1,0 0,3 0,4
Stock 2 30 % 20 % 30 % 0,3 1,0 0,2
Stock 3 30 % 25 % 40 % 0,4 0,2 1,0
Question 2. (4 points)
The Sweet Crude company`s only asset is 20 000 barrels of oil. The oil was purchased a few
years ago for about $18 per barrel and is now worth $25 per barrel. The firm has 1 000 shares
outstanding and intends to issue 500 warrants. Each warrant will cost $180 and give the
holder the option to buy one share of Sweet Crude for $550.
a/ What is the the stock price per share immediately before the warrants are issued ? (1p)
b/ What is the stock price per share just after the warrant is sold if the proceeds from the issue
are immediately paid out to existing shareholders as a dividend ?
c/ Now assume that the warrants are about to expire. What is the minumum oil price per
barrel that would cause the warrants to be exercised, if the firm has its original 20 000 barrel
inventory ? (1p)
d/ Assume that the price of oil jumps to $30 per barrel, and the firm has its original 20 000
barrel inventory. If the warrants are now exercised, what is the new stock price ?
,
, Question 3. (3 points)
Muggen is capitalized with equity and convertible bonds. The convertible debt has a face
value of $10 000, a coupon rate of 6%, 5 years to maturity, and a conversion price of $100 per
share. The yield on similar nonconvertible bonds is 5%.
a/ What is the minimum price at which Muggen´s convertible debt should sell if the market
price of Muggen´s stock is $120 per share ?
b/ What is the minimum price if the stock price is $80 per share ?
Question 4. (3 points)
Your firm is considering issuing one-year debt, and has come up with the following estimate
of the value of the interest tax shield and the probability of distress for different levels of debt:
Suppose the firm has a beta of zero, so that the appropriate discount rate for financial distress
costs is the risk-free rate of 5%. Which level of debt above is optimal if, in the event of
distress, the firm will have distress costs equal to
a/ $1 million?
b/ $5 million?
c/ $27 million?
Calculate the expected return and the standarddeviation (=risk) for the stockportflio given
below.
Portfolios Expected Standard- Correlation between the stocks
Stock hare return deviation Stock 1 Stock 2 Stock 3
Stock 1 40 % 15 % 20 % 1,0 0,3 0,4
Stock 2 30 % 20 % 30 % 0,3 1,0 0,2
Stock 3 30 % 25 % 40 % 0,4 0,2 1,0
Question 2. (4 points)
The Sweet Crude company`s only asset is 20 000 barrels of oil. The oil was purchased a few
years ago for about $18 per barrel and is now worth $25 per barrel. The firm has 1 000 shares
outstanding and intends to issue 500 warrants. Each warrant will cost $180 and give the
holder the option to buy one share of Sweet Crude for $550.
a/ What is the the stock price per share immediately before the warrants are issued ? (1p)
b/ What is the stock price per share just after the warrant is sold if the proceeds from the issue
are immediately paid out to existing shareholders as a dividend ?
c/ Now assume that the warrants are about to expire. What is the minumum oil price per
barrel that would cause the warrants to be exercised, if the firm has its original 20 000 barrel
inventory ? (1p)
d/ Assume that the price of oil jumps to $30 per barrel, and the firm has its original 20 000
barrel inventory. If the warrants are now exercised, what is the new stock price ?
,
, Question 3. (3 points)
Muggen is capitalized with equity and convertible bonds. The convertible debt has a face
value of $10 000, a coupon rate of 6%, 5 years to maturity, and a conversion price of $100 per
share. The yield on similar nonconvertible bonds is 5%.
a/ What is the minimum price at which Muggen´s convertible debt should sell if the market
price of Muggen´s stock is $120 per share ?
b/ What is the minimum price if the stock price is $80 per share ?
Question 4. (3 points)
Your firm is considering issuing one-year debt, and has come up with the following estimate
of the value of the interest tax shield and the probability of distress for different levels of debt:
Suppose the firm has a beta of zero, so that the appropriate discount rate for financial distress
costs is the risk-free rate of 5%. Which level of debt above is optimal if, in the event of
distress, the firm will have distress costs equal to
a/ $1 million?
b/ $5 million?
c/ $27 million?
