Finance Answers

Question 1 

Ford Motor has decided to borrow money by issuing perpetual bonds with a coupon rate of 7%, payable annually, and a par value of $1,000. The 1-year interest rate is 7%. Next year, there is a 35% probability that interest rates will increases to 9% and a 65% probability that they will fall to 6%.

a. What will the market value of these bonds be if they are noncallable?

b. If the company decides instead to make the bonds callable in one year, what coupon will be demanded by the bondholders for the bonds to sell at par? Assume that the bonds will be called if interest rates fall and that the call premium is equal to the annual coupon.

c. What will be the value of the call provision to the company?

How does the search for market niches by British firm help illustrate the theory of comparative advantage?

How does EU manager’s desire to buy domestic products illustrate the importance of consumer taste in international markets?

Explain the types of risks in 2008 financial crisis?

Discuss the main causes of the financial crisis of 2008? Identify the main risk that contributed to this crisis

A $100,000 3% Ontario hydro bond matures November 30, 2016. The current date is November 20, 2013. The price you would pay is 98.9 to buy it. Are market interest rates are higher or lower than 3%?

An Indian multinational corporation has a subsidiary in the United Kingdom. To meet its investment needs that subsidiary firm wants to raise GBP 10 million by issuing five-year bonds in the British market at a coupon rate of 10percent per annum, payable annually. The current spot rate is GBP/INR 82. The INR is expected to depreciate at 1 percent each year for the next five years what is the effective cost of debt to the Indian MNC? Determine the Net Cash Flows for five years is as follows. 8marks

Year 1 2 3 4 5

57.98 62.75 63.38 64.02 926.93

Briefly explain the difference in assumptions underlying portfolio theory and the capital asset pricing model (CAPM)

a) Financial engineering has been disparaged as nothing more than paper shuffling. Critics argue that resources used for rearranging wealth (i.e, bundling and unbundling financial assets) might be better spent on creating wealth (i.e, real estate)

Evaluate this criticism. (15marks)

a) Consider the following information for company XYZ:

Current dividend = 4n

Dividend 2years ago= 3.3n

Current equity beta=1.6

Equity risk premium=10%

Risk free rate=5%

Calculate the price of a share for this company. [5marks]