1. A Treasury bond futures contract (assume a 6% coupon, semiannual payment with 20 years to maturity) has a settlement price of 83’10. What is the implied annual yield? Round your answer to two decimal places. Do not round intermediate calculations.
2.
What is the implied interest rate on a Treasury bond ($100,000, 6% coupon, semiannual payment with 20 years to maturity) futures contract that settled at 100’16? Round your answer to two decimal places. Do not round intermediate calculations.
%
If interest rates increased by 1%, what would be the contract’s new value? Round your answer to the nearest cent. Do not round intermediate calculations.
$
3.
Carter Enterprises can issue floating-rate debt at LIBOR +3 percent or fixed-rate debt at 10.00%. Brence Manufacturing can issue floating-rate debt at LIBOR +3.5% or fixed-rate debt at 11%. Suppose Carter issues floating-rate debt and Brence issues fixed-rate debt. They are considering a swap in which Carter makes a fixed-rate payment of 9.00% to Brence, and Brence makes a payment of LIBOR to Carter. What are the net payments for Carter and Brence if they engage in the swap? A negative net payment should be indicated with a minus sign. Round your answer to two decimal places.
%
Would Carter be better off if it issued fixed-rate debt or if it issued floating-rate debt and engaged in the swap?
What is the net payment for Brence if they engage in the swap? A negative net payment should be indicated with a minus sign. Round your answer to two decimal places.
-(LIBOR + %)
4.
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Hedging The Zinn Company plans to issue $10,000,000 of 20-year bonds in June to help finance a new research and development laboratory. The bonds will pay interest semiannually. It is now November, and the current cost of debt to the high-risk biotech company is 12%. However, the firm’s financial manager is concerned that interest rates will climb even higher in coming months. The following data are available: Futures Prices: Treasury Bonds – $100,000; Pts. 32nds of 100%
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Real Options: Quantitative problems
Quantitative Problem 1:
Florida Seaside Oil Exploration Company is deciding whether to drill for oil off the northeast coast of Florida. The company estimates that the project would cost $4 million today. The firm estimates that once drilled, the oil will generate positive cash flows of $2 million a year at the end of each of the next four years. While the company is fairly confident about its cash flow forecast, it recognizes that if it waits two years, it would have more information about the local geology as well as the price of oil. Florida Seaside estimates that if it waits two years, the project would cost $4.73 million. Moreover, if it waits two years, there is a 60% chance that the cash flows would be $2.102 million a year for four years, and there is a 40% chance that the cash flows will be $1.449 million a year for four years. Assume that all cash flows are discounted at a 11% WACC.
If the company chooses to drill today, what is the project’s net present value? Round your answer to five decimal places.
$ million
Quantitative Problem 2:
Florida Seaside Oil Exploration Company is deciding whether to drill for oil off the northeast coast of Florida. The company estimates that the project would cost $4.47 million today. The firm estimates that once drilled, the oil will generate positive cash flows of $2.235 million a year at the end of each of the next four years. While the company is fairly confident about its cash flow forecast, it recognizes that if it waits two years, it would have more information about the local geology as well as the price of oil. Florida Seaside estimates that if it waits two years, the project would cost $4.75 million. Moreover, if it waits two years, there is a 95% chance that the cash flows would be $2.391 million a year for four years, and there is a 5% chance that the cash flows will be $1.086 million a year for four years. Assume that all cash flows are discounted at a 9% WACC.
What is the project’s net present value in today’s dollars, if the firm waits two years before deciding whether to drill?
$ million (to 5 decimals)
Quantitative Problem 3:
Florida Seaside Oil Exploration Company is deciding whether to drill for oil off the northeast coast of Florida. The company estimates that the project would cost $4.02 million today. The firm estimates that once drilled, the oil will generate positive cash flows of $2.01 million a year at the end of each of the next four years. While the company is fairly confident about its cash flow forecast, it recognizes that if it waits two years, it would have more information about the local geology as well as the price of oil. Florida Seaside estimates that if it waits two years, the project would cost $4.36 million. Moreover, if it waits two years, there is a 75% chance that the cash flows would be $2.209 million a year for four years, and there is a 25% chance that the cash flows will be $0.988 million a year for four years. Assume that all cash flows are discounted at a 9% WACC.
Will the company delay the project and wait until they have more information?
