Examination from Corporate Finance II. for MBA students

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. 0,6 1500 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 1000. 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: 0-35 1; 36-43 2; 44-52 3; 53-61 4; 62-70 - 5

Megoldás Corporate Finance II 1. Példa Bevétel Kiadás Árbevétel 2 000 000 Változó ktg. 800 000 Hibás teljesítés 200 000 Szállítási költség 50 000 Finanszírozási költség 116 667 Veszteség 0 Nyereség 833 333 Összesen 2 000 000 Összesen 2 000 000 Készletállomány 600 000 Vevőállomány 1 350 000 Le: Szállítók -200 000 Forgótőke 1 750 000 2. Példa Tu-154 Eset Beruh. ktg 1 2 NPV Val pi*npv 2 év magas ker. -100 60 200 160,0 0,24 38,40 1. magas 2. alacson -100 60 30-10,0 0,16-1,60 1. alacsony ker. kisz -100 10 200 110,0 0,18 19,80 2 alacsony -100 10 30-60,0 0,42-25,20 1,0 31,4 Kiszállás értékelése Beruh Hozam NPV Val NPV 0,6 Magas ker 80-200,0-120,0 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 -100 300,0 200,0 0,60 120,0 Alacsony ker -100-10,0-110,0 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. -500 100 900 500,0 0,24 120,00 1. magas 2. alacson -500 100 200-200,0 0,16-32,00 1. alacsony ker. kisz -500 30 900 430,0 0,18 77,40 2 alacsony -500 30 200-270,0 0,42-113,40 1,0 52,0 Kiszállás értékelése Beruh Hozam NPV Val NPV 0,6 Magas ker 300-900,0-600,0 0,30-180,0 Alacsony ker 300-200,0 100,0 0,70 70,0 1,00-110,0 Nem érdemes kiszállni Bővítés értékelése Beruh Hozam NPV Val NPV 0,4 Magas ker -500 600,0 100,0 0,60 60,0 Alacsony ker -500-260,0-760,0 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

Vásárláskor Lejáratkor Eladó nyeresége Belső érték 0 200-200 Időérték 300 0 300 Összesen 300 200 100 4. Példa Cu 200 Cd 0 u 1,3 d 0,9 delta 2 c 62,65756 5. 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 0. 3. 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.

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 0,3 40 5 Fluent 0,15 80 6 Soaring 0,05 180 10 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 23000 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 100 110 130 120 100 150 140 130 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.

The firm pays 10-10 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 1000. 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: 0-25 1; 26-32 2; 33-37 3; 38-43 4; 44-50 - 5

1. Feladat base case break even value Solution Corporate Finance II Change in % absolute change Rank equipment cost 100000 189539,34 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 5000 2637,97-47,2% 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 0,5 0 0 0,000-60,00-30 12888,088 6444,044 2 0,3 40 5 119,624 59,62 17,88735 37,195 11,158 3 0,15 80 6 266,041 206,04 30,90612 23260,854 3489,128 4 0,05 180 10 754,645 694,64 34,73225 411033,905 20551,695 1 E(NPV) 53,52572 variance 30496,026 standard dev. 174,631 coeff. Of var. 3,263 project 2: E(NPV) 100 variance 23000 choose the 2. project, because the coeff. Of var. Is lower, and the E(NPV) also higher standard dev 151,6575 coeff. Of var. 1,516575 4. Feladat u 1,5 e^rf*t 1,025315 d 0,6 value of op 184,3618 Cu 400 Cd 0 5. Feladat Revenue Expenses Net sales 20000 Direct costs 10000 Delivery cost 600 Fault items 2000 Financing cost 1470,833 Loss Profit 5929,167 Total 20000 Total 20000 Debtors 16875 Stock 8000 Creditors -2812,5 Working capital 22062,5

3. Feladat Items Actual Budget November December January February March April May June Unit sold 100 110 130 120 100 150 140 130 Unit price 1 500 1 500 1 500 1 500 1 500 1 500 1 500 1 500 Gros sales 150 000 165 000 195 000 180 000 150 000 225 000 210 000 195 000 Paid in 60 days 90% 135 000,0 148 500,0 175 500,0 162 000,0 135 000,0 202 500,0 Paid in 90 days 10% 15 000,0 16 500,0 19 500,0 18 000,0 15 000,0 Cash inflow from sales 135 000,0 163 500,0 192 000,0 181 500,0 153 000,0 217 500,0 Operation plan Opening balance 10 Utilisation 770 Closing balance 20 Production 780 Produced units 100 130,0 130,0 130,0 130,0 130,0 130,0 Unit material cost 500,0 500,0 500,0 500,0 500,0 500,0 500,0 500,0 Material cost 50 000 65 000 65 000 65 000 65 000 65 000 65 000 Material expenses 50 000,0 65 000,0 65 000,0 65 000,0 65 000,0 65 000,0 Labout expenses 10 000,0 13 000,0 13 000,0 13 000,0 13 000,0 13 000,0 Operation expenses 60 000,0 78 000,0 78 000,0 78 000,0 78 000,0 78 000,0 Operation cash flow 75 000,0 85 500,0 114 000,0 103 500,0 75 000,0 139 500,0 Other inflow/outflow Fix cost - mat. cost 10 000 10 000 10 000,0 10 000,0 10 000,0 10 000,0 10 000,0 10 000,0 - lab.cost 15 000 15 000,0 15 000,0 15 000,0 15 000,0 15 000,0 15 000,0 Promissory note Interest charges 10 000 10 000 Divindends 5 000 VAT 25% 21 000,0 24 000,0 21 000,0 15 000,0 30 000,0 27 000,0 Corporate tax Other inflow/outflow -56 000,0-49 000,0-46 000,0-50 000,0-60 000,0-52 000,0 Monthly cash-flow 19 000,0 36 500,0 68 000,0 53 500,0 15 000,0 87 500,0 Cash balance 10 000 5 000 5 000 5 000 5 000 5 000 5 000 Borrowed/invested cash -24 000,0-36 500,0-68 000,0-53 500,0-15 000,0-87 500,0 Cumulated figure -24 000,0-60 500,0-128 500,0-182 000,0-197 000,0-284 500,0