Case- Done individually.
Part 1: Publically Traded Debt and Equity
1. Katherine Graham became CEO of the Washington Post Company and took the company public. The firm has been financed with debt in the form of a coupon bond and has been financed with equity through an IPO.
a. At issue the AA coupon bonds yielded 6% and had a term of 25 years. Model the cash flow of this bond at issue:
b. It is 10 years later and AA 15 year corporate paper yields 5%. How much do the Washington Post bonds cost in the secondary market?
c. Washington Post stock has a 2% dividend and the stock trades at $68 per share. What is the annual dollar amount of the dividend?
2. A CEO of a publically traded company is an Agent of the Principal(s).
a. Who are the principals?
b. What is the chief task of a CEO of a publically traded company?
3. Suppose Ms. Graham and her CFO decide to invest $1.5mil of the company's cash in 1 year Treasury Zeros that yield 1.5%.
a. How much will one of these bonds cost?
b. How many of these bonds will they be able to buy with $1.5mil?
c. What will be the value of the bonds at maturity?
d. Suppose at maturity these funds need to be sent to the U.K for the expansion of the business in Europe, and the spot rate is 1 GBP = $0.61. What will be the value of this cash position in London at maturity of the Treasury Zeros?
Part 2: A Financial Asset and Time Value of Money in Decision Making
4. Suppose Katherine Graham decides to buy a property in Washington D.C. for her newspaper company. The asking price is $750,000. And the closing bid made by her is $660,000.
a. What is the dollar amount and percentage of the spread?
b. What does a spread like this make you begin to suspect about the property market prices in Washington? Select all that apply.
i. The market is efficient
ii. The market is inefficient
iii. I need more information
iv. There are more buyers than sellers
v. There are more sellers than buyers
c. Ms. Graham decides to apply for a mortgage at the Capitol City Federal Credit Union. 30 year mortgages have an interest rate of 4.2% while 15 year mortgages have an interest rate of 3%. Calculate both monthly payments given that she wishes to finance 75% of the purchase price.
d. What is the debt/equity split on this asset immediately upon financing the property?
e. Ms. Graham and her CFO don't like the term of the 30 year mortgage, and don't like the cash flow of the 15 year mortgage. Model your recommendation to them and explain.
f. Name two risks priced in the mortgage interest rates quoted and define them.