FIN 341 W23 - Homework #1

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Oregon State University, Corvallis *

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341

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Finance

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Feb 20, 2024

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docx

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FIN 341 – Homework #1 Instructions Please use this template to respond to the following questions and submit in Canvas once complete. This homework assignment is worth a total of 50 points. Questions 1) Using the data provided in the Excel spreadsheet title “FXI Data”, use the daily price data for the iShares China Large-Cap ETF (An ETF Tracker for China Companies) from Oct 8, 2004, to Nov 29, 2022 (inclusive) and calculate the following: a. The average daily return over the period b. The variance over the period c. The standard deviation over the period Please provide you excel with working formulas when submitting your homework in Canvas (10 pts). Average Return 0.0136% Variance 71.41% Standard Deviation 8.450418363 2) Price out a bond with the following characteristics  15-year maturity  7.9% coupon bond  5.5% risk free rate  1.5% credit spread.  $1000 face value Please provide a screenshot of your work in this document and provide a copy of the excel in your Canvas submission. If the bond is being offered initially for $1000, should you buy it based on your calculation (6 points)? The bond should be bought because the bond value of 1081.97 is higher than the original price.

3) You are offered a chance to buy a perpetuity that will pay $45 dollars a year. The prevailing borrowing rate is 7.8%. What would you be willing to pay for the perpetuity? Show your work (3 pts). Present value of Perpetuity = Amount of continuous cash flow/ Interest rate = 45/0.078 and = 576.923 . The present value of Perpetuity =$576.923 . The perpetuity can be purchased as long as the price for this perpetuity is less than or equal to $576.923. 4) Calculate the value of a 30-year annuity that pays you $20 with a prevailing borrow rate of 5.5%. Please show your work (3 pts). PV = P (1 - (1 + r) ^-n / r) =20 * (1 + 5.5%) ^-30 / 5.5% =290.67 5) Using some financial resource, find an option chain for a public equity with a market capitalization greater than USD 1 billion. Choose one of those options and take a screen shot (post the screenshot here in your submission document). Tell me the following details (6 pts): a. Expiration date- January 26 th , 2024 b. Strike price- 360.00 c. Type of option- Composite d. Current Bid/Offer- 36.80 6) A portfolio manager makes a decision to buy 5,000 shares of OSU Data Mining at 10:00 a.m., when the price was 22.36. The following are snapshots of the trades made during that time.

Time Bid Price Ask Price Execution Price Shares Bought 10:30 22.18 22.36 22.33 900 11:15 22.23 22.43 22.43 600 13:45 22.29 22.48 22.47 700 15:00 22.37 22.63 22.65 800 The closing price for the day was the portfolio manager’s last trade at 22.65, at which point the order for the remaining 2,000 shares was cancelled. Calculate the following: What is the average effective spread (Hint: you know how to calculate all the individual spreads) (4 pts): = ((22.33 - 22.27) + (22.43 - 22.33) + (22.47 - 22.385) + (22.65 - 22.50)) *2/4 = 0.1975 7) Using the same data from question (6) assume that the trades listed are the only ones executed that day in Sumatra. What is the VWAP? (2 pts) VWAP (Volume Weighted Average Price) = Σ i=1 to n ((Volume of shares purchased) i *(Executed Price) i ) / (Total number of shares) = 22.468 8) In a brief paragraph, describe the process of short selling in your own words (6 points). When an investor borrows a security and sells it on the open market with the intention of buying it back later for less money, this is known as short selling. Short sellers’ wager on and profit from a decline in the value of an asset. Long investors, on the other hand, desire a rise in price. 9) Besides an IPO, what are potential alternatives for a private company to raise capital? Describe one method in detail and why would a company choose an IPO over this method (6 points)? Potential alternatives for a private company to raise capital: 1.Debt: Taking out debt could be a good option for founders who require capital but do not want to give up equity. Debt may be the best option for a company if it is chosen carefully and thoughtfully, even though it can also result in financial distress, debt overhang, or bankruptcy. 2.Refinancing: Refinancing is the process of reorganizing a business's debt by changing interest rates and/or lengthening loan terms. Cash from accompany, a company that specializes in corporate refinancing, is frequently used to replace the debt. Although it is frequently only used to partially satisfy investor obligations, this cash can then be used as an exit strategy for investors. 3.Joint Venture/Strategic Alliance: A joint venture or strategic alliance is a great alternative to an IPO for companies that are looking to raise capital for business objectives rather than as a means of providing a lucrative exit for founders.

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4.Acquisition: Selling the company to a larger company is the most typical alternative to an IPO. However, being acquired is only a wise choice if you're looking for a liquidity event. The founders and investors of a company that is acquired are typically compensated with cash or stock shares by the acquiring company in exchange for full ownership of the business. 5.Selling Assets/Operating Segments/Restructure: In the event that early investors or founders require liquidity but are not prepared for a full exit, they might think about selling a portion of their business. This keeps the founders financially involved while preserving their control over the essential operations of their business. For instance, a founder may keep the majority of the business but sell a building or a product line to a different business in exchange for money. 10) Unfortunately, the trading simulator is not complete, so using the following market screen, assume the following trades:  Market Buy for 80 shares.  Limit Buy for 80 shares at 106. What is the price level and number of shares offered at the best offer for each trade (4 pts, 2 pts each correct answer)? 1) The best offer is a price level of 106 with 10 shares offered for the market buy for 80 shares. 2) The best offer is a price level of 106 with 10 shares offered for the market buy for 80 shares at 106.