Your firm is one of the largest bakery’s in the area. As part of your risk management process, you are considering using options to hedge the price risk on your biggest input – wheat. You have determined that a price of R52/per ton would allow for you to keep the same profit margin as last year. The following wheat options offer a strike price of R50/per ton expiring in 1 month:Call options on wheat are selling at a premium of R0.87 per ton.Put options on wheat are selling for R0.72 per ton.Given the information above, will you need need a call or a put option? If each option is for 100 tons, and you require 1000 tons of wheat, demonstrate the outcome if, at expiry, the spot price of wheat is (i) R40 per ton and (ii) R60 per ton. You are an investment analyst at FI Investments tasked to value FBC firm a Southern Agricultural Conglomerate. The following financial information was recently released for FBC. The company’s 2018 and 2017 annual financial reports are contained in tables 1 and 2 below, along with important additional information: Table 1: FBC statement of financial position (R millions) 20182017Cash and equivalentsR149R83Accounts receivable295265Inventory275285Total current assetsR719R633 Total fixed assets3 9093 856 Accounts payable228220Notes payable00Total current liabilities228220 Long term debt1 8001 650 Total liabilities and shareholders equity3 9093 856Number of shares outstanding (millions)100100 Additional information:Depreciation (2018): R483.The firm spent R250m in profitable projects during the course of 2018WACC : 15%Cost of equity of the firm: 10%Tax rate : 40%Table 2: FBC statement of comprehensive income (R millions except for share data) 20182017Total revenuesR3 175R3 075EBIT495448Interest expense104101Net Income235208Dividends per shareR0.80R0.80 Use the information given, to answer the following:Calculate the Free Cash Flow to the Firm (FCFF) for the year 2018. You are told that the Free Cash Flow to Equity (FCFE) of the firm will continue to grow at a rate of 5% for the next 3 years, after which it will stabilize to a rate of 3%. Calculate the intrinsic value of each of FBC’ shares. 9 (Use 2.d.p in your calculations & final answer for this question)

Options are derivative contracts which derive its value from an underlying asset. A buyer of option…

Answered: Your firm is one of the largest…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

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Your firm is one of the largest bakery’s in the area. As part of your risk management process, you are considering using options to hedge the price risk on your biggest input – wheat. You have determined that a price of R52/per ton would allow for you to keep the same profit margin as last year. The following wheat options offer a strike price of R50/per ton expiring in 1 month:

Call options on wheat are selling at a premium of R0.87 per ton.
Put options on wheat are selling for R0.72 per ton.
Given the information above, will you need need a call or a put option?
If each option is for 100 tons, and you require 1000 tons of wheat, demonstrate the outcome if, at expiry, the spot price of wheat is (i) R40 per ton and (ii) R60 per ton.

You are an investment analyst at FI Investments tasked to value FBC firm a Southern Agricultural Conglomerate. The following financial information was recently released for FBC. The company’s 2018 and 2017 annual financial reports are contained in tables 1 and 2 below, along with important additional information:

Table 1: FBC statement of financial position (R millions)

	2018	2017
Cash and equivalents	R149	R83
Accounts receivable	295	265
Inventory	275	285
Total current assets	R719	R633

Total fixed assets	3 909	3 856

Accounts payable	228	220
Notes payable	0	0
Total current liabilities	228	220

Long term debt	1 800	1 650

Total liabilities and shareholders equity	3 909	3 856
Number of shares outstanding (millions)	100	100

Additional information:

Depreciation (2018): R483.
The firm spent R250m in profitable projects during the course of 2018
WACC : 15%
Cost of equity of the firm: 10%
Tax rate : 40%

Table 2: FBC statement of comprehensive income

(R millions except for share data)

	2018	2017
Total revenues	R3 175	R3 075
EBIT	495	448
Interest expense	104	101
Net Income	235	208
Dividends per share	R0.80	R0.80

Use the information given, to answer the following:

Calculate the Free Cash Flow to the Firm (FCFF) for the year 2018.
You are told that the Free Cash Flow to Equity (FCFE) of the firm will continue to grow at a rate of 5% for the next 3 years, after which it will stabilize to a rate of 3%. Calculate the intrinsic value of each of FBC’ shares. 9 (Use 2.d.p in your calculations & final answer for this question)

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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