# 辅导案例-FINC2012

FINC2012 Final Exam Sample Questions (Semester 2, 2015) Page 1 of 4

Final Exam Sample Questions
Corporate Finance II, FINC2012
Semester 2, 2015

Note: This sample question should only be used as a guide to the styles of final exam
questions. The topics covered here are not exhaustive. Your revision should not be
based on these set of questions only. The level of difficulty of this sample exam is
also NOT indicative of the level of difficulty of the actual exam. The answers are in a
separate file.
FINC2012 Final Exam Sample Questions (Semester 2, 2015) Page 2 of 4

Question 1 (10 Marks) DEBT, INVESTMENTS and EQUITY

a) (5 marks) Calculate the price and duration of a 3-year 8% bond, paying semi-annual
coupons, with a current market yield of 10% p.a. Will this bond be more or less sensitive to
interest rate movements than a 3-year zero coupon bond? The face value of both bonds is
\$100.

b) (5 marks) Always Expanding Ltd. has announced a rights issue and the price of the
existing shares has fallen about three percent and they are now trading at \$12 per share. The
rights issue will be made at a price of \$10 per share and shareholders will be entitled to buy
one new share for each share they own prior to the stock going ex-rights. Briefly explain the
likely reason for the fall in price when the rights issue was announced. Also briefly explain
what will happen to the share price on the day the stock goes ex-rights and calculate how big
the price movement is expected to be.
FINC2012 Final Exam Sample Questions (Semester 2, 2015) Page 3 of 4

Question 2 (5 Marks) COST OF CAPITAL, IMPUTATION and FORWARDS

a)(2 marks) Briefly explain how the value of debt tax shields is affected by the imputation tax
system.

b)(3 marks) You have the following information about Loosely Levered Ltd. The debt to
value (D/V) ratio is 50%, the cost of debt is 9%, and the equity beta is 1.2. The risk free rate
of interest is 7% and the market risk premium is 6%. Compute the beta of the debt, the beta of
the assets and the required return on the assets. Assume there are no taxes.
FINC2012 Final Exam Sample Questions (Semester 2, 2015) Page 4 of 4

Question 3 DEBT, TAXES, DIVIDENDS AND FUTURES
a)(5 marks) Outback Gold Ltd. pays dividends about every 6 months. The current dividend of
\$1.00 has just been announced. The dividend is fully franked at the corporate tax rate of 30%.
The marginal investor has an income tax rate of 40% and a capital gains tax rate of 20%.
Calculate the grossed up value of the dividend, the amount of income tax the investor has to
pay and the expected price drop attributable to the dividend payment. Does this price drop
happen when the dividend is announced, on the record date, the ex-dividend date, or the
payment date?
b)(2 marks)Compute the present value of the tax shield according to M&M under a classical
tax system for a company that raises \$1 million through the issue of perpetual debt with an
interest rate of 10%. The corporate tax rate is 30%. Now, assume the debt is callable at face
value and the company plans to exercise the call at the end of year 2, what is the present value
of the tax shield.
THIS IS THE FINAL PAGE
Extra Question
A natural gas company is considering the purchase of a gas reserve in Russia for a price of \$100
million. The total amount of gas reserved is almost unlimited, but due to technological constraint
the amount of natural gas can be extracted each year is 5 million MMBtu. The current spot price
is \$2.92/MMBtu, and it could rise by 20% or fall by 15% in one year’s time, after which the
price will become stable. If the company decides to extract the natural gas, an equipment cost of
\$10 will be incurred. A client has approached the company and made an offer to buy all of its
natural gas at a fixed price starting from next year. Once the extraction begins, the company can
sell the gas at either the year-end market price or the price offered by the client, the first cash in-
flow is generated at the end of the year, and subsequent cash flows are generated at the end of
each year forever. The variable cost can be deemed as zero, the risk free interest rate is 5% p.a.
and the company cost of capital is 15%.
1) Calculate the NPV of this project if the extraction starts immediately after purchasing the
reserve, and there is no offer made from the client. (Assuming the probability for a rise in
natural gas price is equal to that for a fall). (3 marks)
2) Identify the real option in this situation and its specifications (maturity, strike price,
underlying asset, etc.) If you are the client and you want to encourage the company to
purchase this reserve, what is the minimum offer price you should make? Use the
binomial tree method and round your numbers to four decimal points in each step. The
final answer should be rounded to two decimal places (7 marks)

QS, fa), 5 marks
•'
1. Gr.ossed;up valtie.ofthe dlvi.dends= \$1.00/{1 �o�ao) = \$1.428 {1 mark)
2. Ta>q;)ayable :=;0.40{1At8) -fi.30().428) = \$0.t4.Z8 (2 tna:t�s,}
3, Pric:e dmp= {1.:o:.40)/{J,-0.20){1-0,30};:;\$t,071 {Z mark\$}
,Sb> (Z mark\$) •CQmpute t�El pres�nt va'lue of the ta� ,shield. acc:Qri:;IJi,g JQ M�M::u.ntfe.r a cia:Ssical tax
, system for a compa('ly f j,at raises \$1 mill.ion ,thrciugh thefi\$s\le qf r,ierpet_ual debt with an it,t¢re�t
rate .of 10% The i.orp·orate fax .rate is 30%, NciW; li\$slirne·the tl�bt Is �allable adace value aodl th'.e;
company plans tb exercise the call atthe end: of yei:lt z; wh�t:is.tn� present value ofth.e tax shi.el!f.
i} Value of ta.x shie.ld ::; T,D = 0.30*\$1M = \$30M
iit Value of tax s.hi¢1d = (Tc{D)t:o}l{l+ r0) + (Tc(D)rp)/{l + n,f = 3/1.:.l + ;3/{;J..;J.f� 2]273. +2.4793
=\$5.2.Cl 0(\$:s.21 depending on rounding.
A really smart student might say'it depends on what you assume ab91,.1t rollfngove·rthe debt. For
example if you assu.me perpetual rolling over you can make a t;ase for an�wer {{)�
Extra Question
A natural gas company is considering the purchase of a gas reserve in Russia for a price of \$100
million. The total amount of gas reserved is almost unlimited, but due to technological constraint
the amount of natural gas can be extracted each year is 5 million MMBtu. The current spot price
is \$2.92/MMBtu, and it could rise by 20% or fall by 15% in one year’s time, after which the
price will become stable. If the company decides to extract the natural gas, an equipment cost of
\$10 will be incurred. A client has approached the company and made an offer to buy all of its
natural gas at a fixed price starting from next year. Once the extraction begins, the company can
sell the gas at either the year-end market price or the price offered by the client, the first cash in-
flow is generated at the end of the year, and subsequent cash flows are generated at the end of
each year forever. The variable cost can be deemed as zero, the risk free interest rate is 5% p.a.
and the company cost of capital is 15%.
1) Calculate the NPV of this project if the extraction starts immediately after purchasing the
reserve, and there is no offer made from the client. (Assuming the probability for a rise in
natural gas price is equal to that for a fall). (3 marks)
2) Identify the real option in this situation and its specifications (maturity, strike price,
underlying asset, etc.) If you are the client and you want to encourage the company to
purchase this reserve, what is the minimum offer price you should make? Use the
binomial tree method and round your numbers to four decimal points in each step. The
final answer should be rounded to two decimal places (7 marks)
Answers:
1)
NPV = Exp(C1)/(r-g) – C0
Where Exp(C1) = ((2.92* 1.2) *0.5 + (2.92 * 0.85)*0.5) * 5m = \$14.965m
r = cost of capital = 0.15
g = 0
c0 = 100 + 10 = 110m
NPV = 14.965/0.15 – 110 = -\$10.2333m

2)
rf 0.05
cost of capital 0.15
u 1.2
d 0.85
S0 2.92
s up 3.504
s down 2.482
q per year 5
real prob up 0.5
1-real prob up 0.5
exp(c1) 14.965
PV cash flows 99.76667
fixed cost 110
NPV -10.2333
p 0.571429
1-p 0.428571

It is a put option on the natural gas, maturing in one year, and the exercise price is the offer price.
The minimum option value should be 0 - NPV = \$10.2333
Fist, if the offer price is greater than u*s0, it is simple to show that the NPV > 0. Therefore it is
not the lowest offer price. This suggests that the offer price is below Su, therefore option value if
price goes up is 0.

3.504 Payoff = max(X-3.504, 0)*5m/0.15 * 0.5714
Option Value 0
(to achieve minimum offer price, first assume if price goes
up, the option value is 0, the company will sell at market
price rather than take the option and sell at offered price)
2.92
10.23333
2.482 Payoff = max(X-2.482, 0)*5m/0.15 * 0.4286
Option Value 25.07167
Choose the offered price, how much extra can the
company make

Price – market
price
0.75215
Increase in profit per unit as a result of selling at the
offered price (this is not the profit per unit, but an increase
in the profit because you can sell at offered price instead
of the market price)

Offered Price =
increase in gross
profit + market
price
3.23415 Offered price = extra profit per unit + 2.482

Double check if offer price is smaller than 3.504,
otherwise the option value if price increases will not be 0

The minimum offer price should be \$3.23415
Also note, once the company purchases the gas reserve, it will immediately start extraction (the
cost of equipment is justified by the DCFs regardless of a rise or a fall in the price, therefore the
sooner the equipment is deployed, the sooner the company can get cash inflows). Therefore, the
decision of whether the extraction should be delayed is irrelevant (because the reasonable
decision is to start extraction right away) and should not be considered as part of the real option.

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