Advanced Corporate Finance
\nPractice Problem 1
\n1
\n3-16. An Exchange-Traded Fund (ETF) is a security that represents a portfolio of individual
\nstocks. Consider an ETF for which each share represents a portfolio of two shares of
\nHewlett-Packard (HPQ), one share of Sears (SHLD), and three shares of General Electric
\n(GE). Suppose the current stock prices of each individual stock are as shown here:
\na. What is the price per share of the ETF in a normal market?
\nb. If the ETF currently trades for $120, what arbitrage opportunity is available? What
\ntrades would you make?
\nc. If the ETF currently trades for $150, what arbitrage opportunity is available? What
\ntrades would you make?
\nAdvanced Corporate Finance
\nPractice Problem 1
\n2
\n3-17. Consider two securities that pay risk-free cash flows over the next two years and that have
\nthe current market prices shown here:
\na. What is the no-arbitrage price of a security that pays cash flows of $100 in one year
\nand $100 in two years?
\nb. What is the no-arbitrage price of a security that pays cash flows of $100 in one year
\nand $500 in two years?
\nc. Suppose a security with cash flows of $50 in one year and $100 in two years is trading
\nfor a price of $130. What arbitrage opportunity is available?
\nAdvanced Corporate Finance
\nPractice Problem 1
\n3
\n6-2. Assume that a bond will make payments every six months as shown on the following
\ntimeline (using six-month periods):
\na. What is the maturity of the bond (in years)?
\nb. What is the coupon rate (in percent)?
\nc. What is the face value?
\nd. What\u2019s the price of the bond if the discount rate (stated as an APR with semiannual
\ncompounding) is 5%? Use Annuity formula.
\ne. What\u2019s the price of the bond if the discount rate (stated as an APR with semiannual
\ncompounding) is 5%? Use Excel Spreadsheet function \u201cPV.\u201d
\nf. Now assume the price of the bond is $900, what is the annualized discount rate? Use
\nExcel Spreadsheet function \u201cRate.\u201d
\nAdvanced Corporate Finance
\nPractice Problem 1
\n4
\n9-2. Anle Corporation has a current price of $20, is expected to pay a dividend of $1 in one
\nyear, and its expected price right after paying that dividend is $22.
\na. What is Anle\u2019s expected dividend yield?
\nb. What is Anle\u2019s expected capital gain rate?
\nc. What is Anle\u2019s equity cost of capital?
\nAdvanced Corporate Finance
\nPractice Problem 1
\n5
\n9-3. Suppose Acap Corporation will pay a dividend of $2.80 per share at the end of this year
\nand $3 per share next year. You expect Acap\u2019s stock price to be $52 in two years. If Acap\u2019s
\nequity cost of capital is 10%:
\na. What price would you be willing to pay for a share of Acap stock today, if you planned
\nto hold the stock for two years?
\nb. Suppose instead you plan to hold the stock for one year. What price would you expect
\nto be able to sell a share of Acap stock for in one year?
\nc. Given your answer in part (b), what price would you be willing to pay for a share of
\nAcap stock today, if you planned to hold the stock for one year? How does this compare
\nto your answer in part (a)?
\nAdvanced Corporate Finance
\nPractice Problem 1
\n6
\n9-4. Krell Industries has a share price of $22 today. If Krell is expected to pay a dividend of
\n$0.88 this year, and its stock price is expected to grow to $23.54 at the end of the year,
\nwhat is Krell\u2019s dividend yield and equity cost of capital?<\/p>\n
Advanced Corporate Finance
\nPractice Problem 1
\n7
\nFormula Sheet
\nPresent Value of Cash Flows
\nPresent Value of Annuity
\nPresent Value of Perpetuity
\nPresent Value of Growing Perpetuity
\n\u2211= + = \u00d7
\nT
\nt
\nt t r
\nNPV CF
\n0 (1 )
\n1<\/p>\n
—–<\/p>\n
Problem 1 in Advanced Corporate Finance Practice<\/p>\n
1<\/p>\n
3-16. An ETF (Exchange-Traded Fund) is an investment that represents a portfolio of individual securities.<\/p>\n
stocks. Consider an ETF in which each share represents a portfolio of two shares of a company.<\/p>\n
Hewlett-Packard (HPQ), Sears (SHLD), and three General Electric shares<\/p>\n
(GE). Assume the current stock prices for each individual stock are as follows:<\/p>\n
a. What is the ETF’s share price in a regular market?<\/p>\n
b. What arbitrage opportunity exists if the ETF is now trading at $120? What<\/p>\n
Which trades would you make?<\/p>\n
c. What arbitrage opportunity exists if the ETF is now trading at $150? What<\/p>\n
Which trades would you make?<\/p>\n
Corporate Finance Advanced<\/p>\n
Problem 1: Practice<\/p>\n
2<\/p>\n
3-17. Take a look at two securities.<\/p>\n","protected":false},"excerpt":{"rendered":"
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