q3spr12

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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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THIRD QUIZ FNCE 238/738 February 27, 2012 WRITE ALL ANSWERS ON THE TEST. IF YOUR ANSWER CONTINUES ON THE BACK, MAKE A NOTE OF IT ON THE FRONT. 30 PTS / 25 MINUTES NAME:_____________________________________________ SECTION (10:30, 12, 1:30):__________________________________

1. (8 pts) You are an entrepreneur with two potential projects, A and B , which each cost 100, and which have the following payoffs in Depression ( D ) and Prosperity ( P ), each of which has probability ½: D P A 60 140 B 80 130 You want to raise money toward the cost of 100 by issuing a bond with face value 100, to be paid out of the project ’s payoffs. Whatever the bond issue doesn ’t raise, you will pay in yourself, and you get the equity claim on the project. You cannot commit to which project you will choose after issuing the bond. You are considering adding a clause to the bond contract which allows the bondholders to liquidate the project immediately after you choose it, and pay themselves off out of the proceeds. Would such a clause help? Does it depend on how much they can liquidate the project for? Be precise.

2. (8 pts) Metrobank has $100BB in deposits, and in 1 year its assets will be worth either $80BB, with probability ¼, or $120BB, with probability ¾. The government wants Metrobank to raise $20BB with an equity offering, so that its assets will cover its deposits no matter what. Would Metrobank do this voluntarily, or would they have to be forced? Explain.

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3. From the Feb. 21, 2012 Stamford Advocate: The Stamford office of Grubb & Ellis learned in one fell swoop on Tuesday that its parent company filed for bankruptcy and might have sold the Connecticut operation to the publicly traded financial firm BGC Inc. … The Santa Ana, Calif.-based company said the downturn in the U.S. real estate market from 2007 to 2009 caused losses that severely strained its liquidity and hampered its ability to keep operating, according to a court filing. Grubb & Ellis failed to find a buyer outside the bankruptcy process, Chief Financial Officer Michael Rispoli said in the filing. … As part of the deal, BGC will provide a loan of as much as $4.8 million to Grubb & Ellis to keep it operating during the bankruptcy process, Rispoli said. a. (4 pts) What might explain why Grubb & Ellis is being purchased this way? b. (4 pts) Considering G&E ’s considerable existing indebtedness, how can BGC expect to be repaid on this $4.8 million loan?

4. (6 pts) The T. Rowe Price Tax-Exempt Money Fund reports a shadow price, as of 11/30/2011, of $1.0007/share. Why does T. Rowe track this shadow price, and what does it mean for investors who sold their shares on 11/30/2011?