Determine your cash balance in your account stemming from the inflows from this bond at the end of the two-year investment period

1. Evaluate what the following types of risk are:Transaction riskCurrency translation riskEconomic riskIn an essay of less than 1000 words, pick a company of your choice and give examples that relate to this company regarding each type of risk given above. In your essay, also discuss ways of addressing these risks. [Total: 25 marks]Section 2 – Answer 2 out of 4 questions in this section. Make sure you heed the word limits in the essay questions and show your work clearly and completely where calculations are required. You can copy and paste your work from Excel, if you do that, make sure that the Excel calculations are clear.QUESTION 1You purchase a 4-year corporate bond that has a 5% coupon rate, semi-annual coupon payment and a face value of $100 at a price of $100.50. The bond is callable at the end of year 2, right after the year 2 coupon payment, at a call price of 102.Using Goal Seek in Excel or a financial calculator, calculate the yield to maturity and yield to call on this bond. Suppose that you hold the bond for exactly two years at which point the market yield to maturity on similar bonds is at 1.5% per year. Determine if the bond should be called at that point by the issuer. Suppose that you hold this bond until the end of year 2. The following are the rates at which you were able to reinvest the bond’s coupon payments up to the end of year 2:MonthReinvestment rate of accumulated coupon payments63%122%181%These rates are annual but only apply for 6 months, e.g. you reinvest the first coupon for 6 months at an annual rate of 3%, then you receive the second coupon payment at month 12 at which point the combined cash balance in the account gets reinvested at 2%/year for another 6 months.Determine your cash balance in your account stemming from the inflows from this bond at the end of the two-year investment period given that:you bought 1 bond at the price given abovereinvested the coupon payments at the market rates given in the tablesold/parted with the bond at the end of year 2, after it paid its year 2 coupon, dependingn your answer to part (b), either in the market at a yield to maturity of 1.5% per yearr through the issuer exercising the call option on the bond. (5 marks)In an essay of less than 400 words, evaluate why a company might be tempted to issue a callable bond instead of a straight bond. Make sure that you evaluate the thought process and the trade-offs involved when issuing a callable bond vs. a straight bond. (10 marks) [Total: 25 marks] QUESTION 2 ABC Corp. has earnings per share of $2.00 in 2020 and you expect earnings per share to increase by 15 percent in 2021. You estimate that earnings per share are going to grow at 15% per year for 2022 and 2023 as well, as shown in the table below. In 2024, the growth rate will be 6 percent and you expect that this will be a perpetual growth rate. Net capital expenditures (Capital expenditures minus depreciation) will be $4.00 per share in 2020, and then are predicted to follow the pattern given in the table. In 2024, net capital expenditures are expected to be $1.00, and then to grow at 6 percent annually after that. The investment in working capital parallels the increase in net capital expenditures and is predicted to equal 25 percent of net capital expenditures each year. In 2024, investment in working capital will be $0.25 and is predicted to grow at 6 percent thereafter. ABC Corp. will use debt financing to fund 50 percentf net capital expenditures and 50 percent of the investment in working capital.Year Growth rate eps Net capex per share2021 2022 2023 2024 15% 15% 15% 6% 4.00 3.00 2.00 1.00Calculate the annual estimated FCFE per share figures for ABC Corp. for 2021-2024. (5 marks)Using a required rate of return for ABC Corp. stock of 10 percent, find the value per share using a two-stage FCFE valuation approach. Assume that the valuation is done on December 31, 2020. (5 marks)In an essay of less than 650 words, describe in detail and critically discuss the Capital Asset Pricing Model’s (CAPM) approach to obtaining an estimate of the required rate of returnn a risky asset. Use graphs if necessary. (15 marks) [Total: 25 marks]QUESTION 3A 2-year gilt and a 4-year one both have 3% coupon rates, paid semi-annually. The 2-year gilt sells at a yield to maturity (ytm) of 2% and the 4-year one sells at 2.4% ytm.Determine the prices on these two gilts using a face value of 100. (5 marks)Determine these two gilts’ new prices if their annual yields both suddenly jump up by 30 basis points. (5 marks)Calculate the percentage return on each of the two gilts assuming that an investor buys them at the yields given in the question and sells them at the new yields given in part (b). (5 marks)In an essay of less than 400 words, comment on the difference in the two returns you find in part (c) in an interest-rate risk context. Specifically, evaluate how the maturity of a bond affects its interest rate risk and how investors should make maturity choices given their investment horizon and liquidity needs. (10 marks)[Total: 25 marks]QUESTION 4Liguria Bank is a retail bank in Italy. Twenty years ago Liguria’s board decided to take advantage of the growth potential in Eastern European countries and acquired Bank Prague, a commercial bank in Czechia. The current board wishes to strengthen the bank’s equity and concentrate on the Italian market. Its Czech subsidiary has been doing well and its local competitors have contacted Liguria’s board to ask if it would be interested in selling it. Most of the directors agree that the Italian operation needs more capital and so are receptive to selling Bank Prague.The CFO has recommended that the sales price of Bank Prague be based on predicted free cash flows (in millions of Euros) given below:Year123400450500After Year 3, free cash flows should be assumed to increase at 5% per annum. The discount rate to be used should be the current weighted average cost of capital, which is 8%.Calculate the expected sales price of Bank Prague. (5 marks)In an essay of less than 500 words, critically discuss income-based valuation as a method for valuing a firm or subsidiary, outline how it could be used to value Bank Prague and the pitfalls that one might be careful about avoiding when using an income-based valuation exercise in this case. (12 marks)In an essay of less than 350 words, define free cash flows and evaluate why they might be more useful in certain valuation cases than dividends. (8 marks) [Total: 25 marks] Section 3 . Answer 1 out of 3 questions in this section. Make sure you heed the word limits in the essay questions and show your work clearly and completely where calculations are required. You can copy and paste your work from Excel, if you do that, make sure that the Excel calculations are clear. QUESTION 1 ABC Corp. is a US based company that sells its goods in a number of European countries and is expecting to receive €500,000 from a customer based in France in exactly 6 months from today. The spot and 6-month forward rates are €2.220 per $1 and €2.537 per $1 respectively. The following interest rates are available:Deposit rateBorrowing rateEuros3% per annum6% per annumDollars1.5% per annum4% per annumGiven the above information, respond to the following:Explain exchange rate risk and explain how ABC Corp. may be threatened by it. (10 marks)Evaluate how forward contracts enable firms such as ABC Corp. to hedge against exchange rate risk (10 marks)Evaluate whether a money market hedge or a forward market hedge would be suitable for ABC Corp (5marks) [Total: 25 marks]QUESTION 2A buyer and seller of crude oil futures contracts with an underlying value of £100,000 are required to provide an initial margin of 15%. The table below provides information on the change in the value of the futures contracts for five consecutive days of the week.MondayTuesdayWednesdayThursdayFridayValueof future(£)100,00090,00087,000100,000120,000Evaluate what the initial margin is and how it protects investors against the possibility of default. Calculate its amount in sterling for this example. (10 marks)Calculate the variation margin and accumulated profit/ loss for the buyer and the seller for each day of the week in the following table (10 marks)MondayTuesdayWednesdayThursdayFridayValue of future (£)100,00090,00087,000100,000120,000Buyer’s positionInitial marginVariation marginAccumulated profit/lossSeller’s positionInitial marginVariation marginAccumulated profit/lossc) If both, the buyer and seller, decide to close their position on Friday how much will the buyer and seller be entitled to receive? (5 marks)[Total: 25 marks]QUESTION 3In his paper ‘Has finance made the world riskier’, Raguram Rajan states that:“While the collection of data on the growth of the credit derivatives and credit default swaps in the last several years is still in early stages and probably underestimates their usage, the takeoff of this market is a testament to how financial innovation has beenused to spread traditional risks”Critically appraise how this relates to the use of derivatives and discuss whether and to what extent you agree or disagree. Use 1000 words or less.[Total: 25 marks]TOTAL 100 MarksMARKING CRITERIAMarking CriteriaFailure <40%40-59%50-59%First > 70%Understanding Key IssuesMinimal Understanding of key issuesMain issues largely identified but some lack of focusAll issues clearly understood, with some differentiation in terms of importanceIssues clearly understood and differentiates in terms of importanceEvidence of reading and/or choice of appropriate conceptsLimited evidence of reading or inappropriate use of module material, important work not considered or key concepts are ignoredEvidence of reading or use of module material, but inconclusiveGood use of material and well-justified choice of module material.Clear evidence of high level of scholarship.AnalysisQuantitative analysis inaccurateSome analysis of central issues, but with some inaccuracies.Relevant and full analysis.Comprehensive and critical analysis of central issues.Presentation, structure, clarity, use of grammar, correct spellingPoor in terms of clarity, lack of demonstration of workings, grammatical mistakes, inadequate or incorrect referencingReasonably clear presentation, reasonable referencing, few grammatical or spelling mistakesVery good presentation and communication skills, accurate referencing, very few/ no grammatical or spelling errorsExcellent presentation and communication skills, accurate referencing, no errors, well – organised materialAttainment of learning objectivesAttainment of few/none of the relevant learning objectivesAttainment of a good majority of the relevant learning objectivesAttainment of substantial majority of the relevant learning objectivesAttainment of nearly all of the relevant learning objectives