fall16q03ans

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University of Pennsylvania *

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238

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Finance

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Nov 24, 2024

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6

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THIRD QUIZ FNCE 238/738 October 17, 2016 WRITE ALL ANSWERS ON THE TEST. IF YOUR ANSWER CONTINUES ON THE BACK, MAKE A NOTE OF IT ON THE FRONT. 45 PTS / 25 MINUTES NAME:_____________________________________________ SECTION (12, 1:30 or 3):__________________________________
1. (10 pts) News release a couple weeks ago: Oct. 1, 2016 (GlobeNewswire) - Cosi, Inc. (NASDAQ:COSI), the fast-casual restaurant company, today announced that it has appointed Randy Kominsky of Alliance For Financial Growth to serve as Chief Restructuring Officer, effective Tuesday, October 4, 2016…As previously announced, Cosi and its subsidiaries filed voluntary Chapter 11 petitions in the United States Bankruptcy Court for the District of Massachusetts on September 28, 2016. The appointment of a Chief Restructuring Officer acceptable to the lenders was required by the terms of the previously disclosed non-binding Debtor-In-Possession (DIP) Financing Term Sheet dated September 28, 2016. As previously announced, in accordance with the sale process under Section 363 of the Bankruptcy Code, notice of the proposed sale to the DIP lenders or their designees will be given to third parties and competing bids will be solicited. a. (5 pts) In general, how does a bankruptcy filing change the day-to-day operations of a firm? What are the important changes to the operating environment from the day before the filing to the day after? (bullet points are fine) Automatic stay of creditor claims – creditors have to stop getting paid, and debtor has to stop paying them DIP financing Breaking leases (and other executory contracts) b. (5 pts) Considering the specific information in this press release, how did filing bankruptcy benefit Cosi? That is, what did filing Chapter 11 allow them to do that would otherwise have been more difficult to do? Besides the issues mentioned specifically in this press release, what else might the filing allow Cosi to do that it might want to do? Need to file Chapter 11 to sell assets with Section 363 auction o Difficult for distressed firm to sell assets outside of Chapter 11, due to fraudulent transfer concerns, and liens and other liabilities traveling with the assets Need DIP financing Also, allows Cosi to break leases and therefore shut down unprofitable locations
2. (10 pts) Here’s a press release, edited and simplified a little, from this summer: FRISCO, TEXAS, August 1, 2016 - Comstock Resources, Inc. announced today that it has commenced an offer to exchange any and all of its existing senior notes for three new series of secured notes and, in the case of the Company's 10% Senior Secured Notes due 2020, warrants exercisable for the Company's common stock. The following table sets forth each series of outstanding notes subject to the Exchange Offer and the consideration offered for such series in the Exchange Offer: Notes to be Tendered Principal Amount Outstanding (MM) Exchange Consideration per $1,000 Principal Amount of Notes 10% Senior Secured Notes due 2020 $700.0 $1,000 principal amount of Senior Secured Toggle Notes due 2020 and warrants exercisable for 1.5 shares of common stock 7.75% Senior Notes due 2019 $288.5 $1,000 principal amount of 7.75% Second Lien Convertible PIK Notes due 2019 9.50% Senior Notes due 2020 $174.6 $1,000 principal amount of 9.50% Second Lien Convertible PIK Notes due 2020 The second lien notes will be convertible into 73.5% of the common stock. To validly tender their notes, the participating noteholders will be required to deliver a letter of transmittal and consent to certain amendments to the terms of the existing notes and related indentures that would remove certain of the covenants governing the existing senior notes and approve the release of the collateral with respect to the existing senior secured notes. The Exchange Offer is conditioned upon among other matters (i) the tender of (x) 95% outstanding principal amount of the existing senior secured notes and (y) 95% outstanding principal amount of the existing 2019 notes and 2020 notes (on an aggregate basis) and (ii) completion of the Exchange Offer by Sept. 15, 2016. [A PIK ( P ayment I n K ind) note is one that pays coupons in the form of more bonds, as opposed to cash, and a toggle note is one where the issuer has an option to pay coupons in the form of more bonds, as opposed to cash] What might a bondholder be tempted to do when invited to make this exchange, and how is the offer structured to address that temptation? ( don’t worry about all the details of the structure, just the relevant ones) Bondholders are invited to voluntarily exchange their bonds for new bonds that are less onerous for Comstock. This is likely to be a concession of value, and each would like to hold out while others exchange, thereby free-riding on their concessions. To encourage participation, this offer Is conditioned on 95% participation of the various classes of notes, which makes it difficult to hold out on an offer that goes through, and Is also conditioned on the exchanging bondholders voting to weaken the old bonds on their way out of them. This punishes the holdouts by leaving them with a weaker claim on the creditor
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3. (10 pts) What assumptions lead to the conclusion that, in theory, the past performance of mutual funds should not help predict their future performance, even if some managers have more skill than others? You need decreasing returns to scale on money management, so that the manager’s alpha goes down as more money flows into the fund You also need investors to be able to freely reallocate their money across funds So when one fund’s prospects are better than another’s, money flows freely from the worse prospect to the better one, equalizing their expected performance by increasing the prospects of the worse fund and decreasing the prospects of the better one
4. (10 pts) XLK is an exchange-traded fund holding tech stocks. On October 14 th , at 9:45AM, the market price was $47.65/share, while the net asset value was $47.78/share. Does this suggest a profitable trading opportunity? What would it be, who would be making it, and what considerations are important? ETFs let large investors trade in kind with the fund. So in this case, with the NAV higher than the ETF share price, the indicated trade is to buy ETF shares, exchange them for the constituents, and then sell the constituents, thereby locking in the $0.13/share difference as a profit. The main consideration would be that transactions costs on the shares would eat into that $0.13/share paper profit.
5. (5 pts) Your hedge fund routinely enters swap contracts, and when the trade is over, if your counterparty offers you bad terms for closing out a swap, you don’t bother closing it out, and instead enter an offsetting swap with a different counterparty. Since the effect on net cash flows is the same as closing it out, and you made money by avoiding the bad terms, the net effect is all positive. Comment on the last sentence. Agree or disagree? Explain. This logic is fine in good times, but runs into trouble when the fund runs low on capital. The multiplicity of swaps means that the clearing broker pays out and takes in more money each day, and will thus be less willing to pay what needs to be paid, in anticipation of receiving what should be received, when the fund has less capital to cover losses. If the fund had simply closed out the swap in the first place, the clearing broker would not be exposed like this.
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