Examination from Corporate Finance II. for MBA students

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1 Examination from Corporate Finance II. for MBA students 1. A company has an order to produce vitamin tablettes. The quantity of order is 4 million tubes, and the terms of order is 4 month. The unit price of tubes is 500 forint, whose gross profit margin is 60%. The ratio of material cost in unit price is 30%. The level of stocks increases by 600 million forint. The customers pays in 90 days after delivery. The creditors (including the employees) should get their money in 30 days. The size of returned goods due to failed delivery is expected to be 10%. The delivery costs paid by the firm is 50 million forint. The cost of finance is 20%. Calculate the value of order for the company! (7 points) 2. A charter company is considering the introduction of a new charter flight to the Canaries. It has got two options. The TU-154 costs 100 million forint and would carry the following cash flows in function of. Million forint Prob. Cash flow Prob. Cash flow Year 1. High 0,4 60 Low 0,6 10 Further years ( high in High 0,6 200 Low 0,4 30 year 1 Further years (low in year 1) High 0,3 200 Low 0,7 30 Another option is to buy a more comprehensive Boeing plane. The Boeing costs 500 million forint and carries the following cash flows: Million forint Prob. Cash flow Prob. Cash flow Year 1. High 0,4 100 Low 0,6 30 Further years ( high in year 1 High 0,6 900 Low 0,4 200 Further years (low in year 1) High 0,3 900 Low 0,7 200 The cash flows have been already discounted. Calculate the NPV of this two investment! Is it worth to invest any of planes? Let s suppose, that you may sell both planes, the Boeing for 300 million forint and the TU-154 for 80 million forint. You can buy new TU-154 and Boeing plane at current price in one year. In case of buying the additional TU-154 you expect for the following cash flow: Million forint Prob Cash flow Prob Cash flow Further year (high in year 1) High 0,6 500 Low 0,4 20 In case of buying an extra new Boeing you may expect: Million forint Prob Cash flow Prob Cash flow Further years (high in year 1) High dem. 0, Low 0,4-60 Calculate the NPV of these two investments considering the enlargement and the bailing out options. Give advice for the management, which plane should be bought? (20 points) 3. An investor sold a MATAV call option with exercise price of 1000 for 300 Ft, when the market price of MATÁV was 800. In date of settlement the price of Matáv was 1200 Ft. Is it worth calling the option? What is the profit (or loss) of investor? How has the internal and time value of option changed from the purchase till the settlement? (4 points) 4. The current price of a share is Let s assume, that the price can exclusively be 1300 or 900 in a quarter. What is the call option price with 1100 exercise price, if the risk free rate of return is 10%? What is the option s delta? (4 points) 5. Describe the risk diagnostic methods! What are their core reasons and what are their advantages and disadvantages? (10 points) 6. How can you evaluate a corporate share with the option pricing? What type of option is it, and what are the option pricing parameters? Scores: ; ; ; ;

2 Megoldás Corporate Finance II 1. Példa Bevétel Kiadás Árbevétel Változó ktg Hibás teljesítés Szállítási költség Finanszírozási költség Veszteség 0 Nyereség Összesen Összesen Készletállomány Vevőállomány Le: Szállítók Forgótőke Példa Tu-154 Eset Beruh. ktg 1 2 NPV Val pi*npv 2 év magas ker ,0 0,24 38,40 1. magas 2. alacson ,0 0,16-1,60 1. alacsony ker. kisz ,0 0,18 19,80 2 alacsony ,0 0,42-25,20 1,0 31,4 Kiszállás értékelése Beruh Hozam NPV Val NPV 0,6 Magas ker ,0-120,0 0,30-36,0 Alacsony ker 80-30,0 50,0 0,70 35,0 1,00-1,0 Nem érdemes kiszállni. Bővítés értékelése Beruh Hozam NPV Val NPV 0,4 Magas ker ,0 200,0 0,60 120,0 Alacsony ker ,0-110,0 0,40-44,0 1,00 76,0 Érdemes bővíteni NPV összesen 61,8 Boeing Eset Beruh. ktg 1 2 NPV Val pi*npv 2 év magas ker ,0 0,24 120,00 1. magas 2. alacson ,0 0,16-32,00 1. alacsony ker. kisz ,0 0,18 77,40 2 alacsony ,0 0,42-113,40 1,0 52,0 Kiszállás értékelése Beruh Hozam NPV Val NPV 0,6 Magas ker ,0-600,0 0,30-180,0 Alacsony ker ,0 100,0 0,70 70,0 1,00-110,0 Nem érdemes kiszállni Bővítés értékelése Beruh Hozam NPV Val NPV 0,4 Magas ker ,0 100,0 0,60 60,0 Alacsony ker ,0-760,0 0,40-304,0 1,00-244,0 Nem érdemes bővíteni NPV összesen 52,0 Tu-154-est kell venni, mert NPV-je nagyobb. 3. Példa

3 Vásárláskor Lejáratkor Eladó nyeresége Belső érték Időérték Összesen Példa Cu 200 Cd 0 u 1,3 d 0,9 delta 2 c 62, Példa Megnevezés Vételi Eladási Alaptermék piaci ára Egyenes Fordított Opció kötési ára Fordított Egyenes Alaptermék árának relative szórása Egyenes Egyenes Opció lejárata Egyenes Egyenes Kockázatmentes kamatláb Egyenes Egyenes Bizonyítás menete: 1. Vegyük meg a részvényt hitelből a részvény fedezete mellett. Mekkora hitelt kapunk? 60 jelenértékét a kockázatmentes kamatlábbal, azaz 58,5-t. 2. Saját erő mértéke 90-58,5=31,5. Negyedév múlva kimenetünk vagy 60 vagy Ha 90-es kötési áron veszünk vételi opciót, kimenetünk vagy 30 vagy 0 lesz. 4. A béta ebből következően 2 lesz. Ezzel kell osztani a saját erő mértékét, hogy megkapjuk a vételi opció értékét, ami 15,75.

4 Examination from Corporate Finance II. for MBA students 1. A company is considering a new project for producing hi-fi towers. The equipment (including the installation) costs 100 mhuf. The company is willing to sell 5 thousand unit per annum. The unit price of a hi-fi tower is estimated to be 40 thousand forint. The direct material cost and the direct labour cost is 10 thousand and 20 thousand forint respectively. The lifetime of project is 5 years, the equipment has no salvage value. Ignore the effect of tax and inflation! If the real cost of capital is 10%, would you accept the project? Make the breakeven analysis to detect the most sensitive parameter of the project! (10 points) 2. An oil company is considering to buy a new oil field near Qatar, Arab Emirates. Based on the exploring research the distribution of outcomes of drillings is the following: Platform Probability Annual after tax operating cash flow ($ 000) Estimated life time Dry 0,5 - - Wet 0, Fluent 0, Soaring 0, The drilling cost may be 60 thousand $. If the real expected rate of return is 20%, what is the E(NPV) of this project! Ignore taxes and inflation! You know some figures about another oilfield in the Middle-East. This may have an E(NPV) of 100 thousand $ with a thousand $ variance. Which project should be taken, if we are a large company, and we are no risk averse? Which project should be accepted, if these projects are mutually exclusive? (7 points) 3. The Liquid Ltd asked you to reorganise the finance of the company. As the company cannot project its cash flow, it doesn t know, when should be loan raised or when can be the extra cash invested. The budget should be made for the next half year. The following data are collected: 1. The company produces clutches for Opel Astra. The company have got the following orders to the next semiyear. Actual Budget November December January February March April May June The net unit price of a clutch is $1200, the VAT is 25%. The Opel pays generally 60 days after delivery, however 10% is paid in 90 days. The closing balance of finished goods is 10,000 units. The company wants to keep 20,000 units at the end of June. To better utilise the capacity, the company is willing to produce the same units in each month. The unit material cost is net $400 due to pay in next month. The direct labour cost is $100 also paid in next month. The production was 100 in December. The fixed material cost of the company is 30 million $, in which the material cost is 10 million, the labour is 15 million and the depreciation is 5.

5 The firm pays million $ interest in January and April respectively. Dividend of 5 million $ is due in May. The VAT is due in 20 of next month. The base of VAT is the net revenue net material cost. The cash reserve of the firm to cover unexpected expenses is need to be 5 million $. Currently the firm has 10 million cash balance in current account. The deposit rate is 5%, the lending rate is 10%. Prepare the semiannual cash budget! Give advice for the firm, when and how much should be invested or borrowed? (14 points) 4. The current price of a share is Let s assume, that the price can exclusively be 1500 or 600 in a quarter. What is the call option price with 1100 exercise price, if the risk free rate of return is 10%? (4 points) 5. A firm produces gas pipe for order. The works got a new order of 100 thousand gas pipe. The unit price of gas pipe is 200 forint. The direct unit cost is 100 forint, from which the material cost is 50 forint. The order can be fulfilled in 4 months. The stocks is increasing by 8 million HUF. The customer pays 90 days after delivery. The suppliers (included the workers) get the money after 30 days. The ratio of fault items is estimated to 10%. The delivery cost will be 600 thousand forint. The cost of capital is 20% p.a. Count the value of order! (6 points) 6. How can you evaluate an enhancement with the option pricing? What type of option is it, and what are the option pricing parameters? (5 pont) 7. What are the conditions to apply the Black-Scholes model for option pricing? (4 points) Scores: ; ; ; ;

6 1. Feladat base case break even value Solution Corporate Finance II Change in % absolute change Rank equipment cost ,34 89,5% 89,54% 1 unit price 40 35,28-11,8% 11,81% 5 material cost 10 14,72 47,2% 47,24% 3 labour cost 20 24,72 23,6% 23,62% 4 lifetime 5 2,12-57,7% 57,68% 2 quantity ,97-47,2% 47,24% 3 discount rate 10% 40,6% 306,0% 306,01% 5 AF(10%,5) 3,79 2,00 AF(10%,4) 3,17 2,04 2. Feladat drilling cost 60 thousand expected rate of 20% Cases Probability CF years GPV NPV NPV*prob (NPV-E(NPV))^2 (NPV-E(NPV))^2*prob 1 0, ,000-60, , , , ,624 59,62 17, ,195 11, , , ,04 30, , , , , ,64 34, , ,695 1 E(NPV) 53,52572 variance 30496,026 standard dev. 174,631 coeff. Of var. 3,263 project 2: E(NPV) 100 variance choose the 2. project, because the coeff. Of var. Is lower, and the E(NPV) also higher standard dev 151,6575 coeff. Of var. 1, Feladat u 1,5 e^rf*t 1, d 0,6 value of op 184,3618 Cu 400 Cd 0 5. Feladat Revenue Expenses Net sales Direct costs Delivery cost 600 Fault items 2000 Financing cost 1470,833 Loss Profit 5929,167 Total Total Debtors Stock 8000 Creditors -2812,5 Working capital 22062,5

7 3. Feladat Items Actual Budget November December January February March April May June Unit sold Unit price Gros sales Paid in 60 days 90% , , , , , ,0 Paid in 90 days 10% , , , , ,0 Cash inflow from sales , , , , , ,0 Operation plan Opening balance 10 Utilisation 770 Closing balance 20 Production 780 Produced units ,0 130,0 130,0 130,0 130,0 130,0 Unit material cost 500,0 500,0 500,0 500,0 500,0 500,0 500,0 500,0 Material cost Material expenses , , , , , ,0 Labout expenses , , , , , ,0 Operation expenses , , , , , ,0 Operation cash flow , , , , , ,0 Other inflow/outflow Fix cost - mat. cost , , , , , ,0 - lab.cost , , , , , ,0 Promissory note Interest charges Divindends VAT 25% , , , , , ,0 Corporate tax Other inflow/outflow , , , , , ,0 Monthly cash-flow , , , , , ,0 Cash balance Borrowed/invested cash , , , , , ,0 Cumulated figure , , , , , ,0