I Need HELP during this exam

[Oliver]

Hello!

Im new on this forum, I dont know if I'm in the right place but..

Actually someone gave me this idea: well I have an exam tomorow in international business finance and I need help with it. I haven't studied lately since I have to work a lot but I'm doing my best and still isn't enough :)

The exam will take place tomorow morning 09:00 time zone GMT +1hr .

I'm going to post here some of the questions that I can't answer, and I just hope that someone can help me.

the exam is 3 hrs long..

Thanks in advance!

[Oliver]

Good morning!
What ever help I can get is appreciated!

Carlsberg is one of the world’s largest brewery groups. The foundations of carl. Core busiess are the beer markets of western Europe, eastern Europe (BBH) and Asia. The markets in carlsberg’s business portfolio are at different stages of development – some are mature with stagnating or declining consumption, while others are emerging and growing. These different stages of development often reflect standards of living, which means that factors such as income per capita ans the size of the middle class will have a say in the totals beer consumptions and its growth. The markets are also undergoing major changes. This requires constant adaptation to a market situation featuring keen competititon on marketing, innovation, cost efficiency and brewery investments and acquisitions. 2008 marked a milestone with the partial acquisition of Scottish & Newcastle whereby Carlsberg gained full control over its business in Russia and other eastern European countries as well as the French brewery Kronenbourg and Greek brewery mythos.

Carlsberg activities means that the group’s profit and equity may be exposed to a variety of financial risks, primarily related ot changes in exchange rates and interest rates. The main principle for funding currency in subsidiaries is that loans and borrowings should be in a local currency or hedged to local currency to avoid exchange rate risk. The most significant interest rate risk in the Carlsberg group relates to interest-bearing debt. The Carlsberg group derives a substantial part of its revenue streams from Baltika and Russia and as such is susceptible to an economic downturn in the country, which could result in a significant devaluation fo the Russian rouble and a corresponding negative impact on revenue and earnings for the Carlsberg group.

Carlsberg’s shares are listed on NASDAQ OMX Copenhagen A/S in 2 classes: Carlsberg A and Carlsber B. Each A share carries 20 votes, while each B share carries 2 votes but is entitled to a preferential dividend. The b share is included in NASDAQ OMX Copenhagen A/S’s Nordic Large Cap and OMXC20 blue-chip indices. NASDAQ OMX Copenhagen A/S also operates sector indices in accordance with the Global Industry Classification Standard, and here the Carlsberg B share is included in the Consumer Staples index. In 2008 Carlsberg’s B share topped DKK551, but as a consequence of the financial crisis, the general decline in prices on the stock markets and a significant increase in risk premium on investments, for example in Russia, the price fell and the share ended the year at DKK 171. overall, the prince of the B share fell by 66% in 2008. the market value of the company’s shares fell to just under DKK 26bn at the end of 2008 drom DKK 46bn at the end of 2007.
At 31 dec. 2008 the company’s largest shareholder was the Carlsberg Foundation with 31, 776, 807 A shares and 14,487,165 B shares. At the end of 2008 Carlsberg had more than 57,000 registered shareholders, together holding nominal capital of DKK 2,255m, corresponding to 77% of the share capital. Based on the info available, it is estimated that around 23% of the shares in free float(i.e. excluding the Carlsberg foundation’s holding) are owned by shareholders in Denmark and 77% by foreign shareholders on unidentified shareholders ( also believed to be primarily foreign)

Q1:
Carlsberg entered a 3yr currency swap last yr in which Carlsberg agreed to receive floating rate GBP and pay floating rate EUR
The terms of the swap were based on
EUR per GBP 1.25
EUR 1 yr swap rate: 4.45%
GBP 1 yr swap rate: 5.45%
A principal amount of GBP 30mill (EUR 37.5 mill)

Now after having exchanged the payments for year 1 and with 2 years remaining, carsberg wants to know the market value of the swap. The following market prices prevail now:

EUR per GBP 1.13
EUR 1yr swap rate 1.50%
GBP 1yr swap rate 1.25%

Calculate the gain or loss (the present m. value of the remaining life of the swap) that Carlsberg could receive from or should pay to the swap dealer now in order to unwind the swap.

Q6:
The CFO has asked you for your qualified guess of the likely change in the USD per EUR exchange rate within the next yr in terms of direction and if possible also in terms of magnitude. The present exchange rate is 1.35 USD per EUR.

You have the following info for the US:

Short term interest rate = 0.25%
Ten yr government bond yield = 3.18%
Inflation = -0.4%
GDP growth = -2.6%
S&P 500 = 805 (stock index)
Dow Jones Industrials = 7.850( stock index)

You have the following info for Euro-land:

Short term interest rate = 1.00%
Ten yr government bond yield – 3.41% (Germany)
Inflation = 0.6%
GDP growth = -1.4%
Dow Jones Euro Stoxx 50 = 2.357 ( stock index)

WHAT WILL YOU TELL THE CFO AND WHY?

[Oliver]

I really need help..

I only have 1hr left.

thank you!

[Oliver]

Well.. I managed :)

I appreciate for taking the time to read my posts, though.

I'm gonna try be more active on this forum, I saw some very interesting stuff.

[NoMoreExams]

I'm confused, was this exam open book AND you could ask other people for help?

[Oliver]

Yes!

I have another exam this Friday, Advanced Corporate Finance.
That's the tuff one...

[NoMoreExams]

Weird I've heard of open book but never open buddy...

[nonlnear]

Weird I've heard of open book but never open buddy...

It's not what you know indeed! Makes you wonder what the purpose of the test was... :laugh:

[winvicta]

Does anyone know if the Q1 above is solvable in its present form? The swap being floating-floating basis swap, without the 2-year and 3-year spot rates for each currency, I don't think the problem is solvable.

[Oliver]

Good morning! 09:30 right now, time zone GMT +1hr
and I have 2h more to go.
I'm gonna start omy own but, if anyone has some suggestions that's even better, im gonna check the forum every 20mins or so.

Thank you!

I. Lucky is a professional investor who focuses on the automobile industry in the US. She has discovered that a two-factor model can be used to describe the stocks in this industy, where the first factor describes the overall economy, GDP, representing the overall demand for automobiles in the US and the second factor represents exchange rates and therefore the extent of foreign competition. Lucky and the market have the following expectations about Ford, GM and Chrysler: Ford has an expected return of 8%, a beta of 0.1 with respect to the first factor and a beta of 0.4 with respect to the second factor. GM has an expected return of 12%, a beta of 0.4 with respect to the first factor and a beta of 0.8 with respect to the second factor. Finally, Chrysler has an expected return of 12%, a beta of 0.2 with respect to factor 1 and a beta of 0.5 with respect to factor 2. the risk free rate is 5%.

a) Determine if it is possible to make an arbitrage profit in this market. Show the required investments in each asset.
b) Briefly discuss any problems there may be in implementing this strategy.


II. Firm ABC is contemplating changing the capital structure by issuing debt with the same priority as the old debt and using the proceeds to pay dividends to the share holders. The value of the firm is 150mil. And the face value of the old debt is 90mill. The firm is contemplating issuing 25mill. in new debt and paying the proceed in dividends. The term to maturity of the old and new debt is five years, the risk free rate is 8% and the standard deviation of the total of the firm’s assets is 20%. Neither the old nor the new debt has any coupon payments.
a) What is the market value of the firm’s debt and equity before the proposed change?
b) What is the wealth position of the share holders and old debt holders after the change?
c) How can debt holders protect themselves?
d) Discuss other ways that shareholders can extract wealth from the bond holders.


III. Mr. Smith is the owner and founder of Smart Corp. and he would like to sell 40% of his shares in the firm to finance the purchase of a new house. Mr. Smith has estimated that the value of the firm next year is either 250mill, 350mill or 450mill. Mr. Smith knows that the three scenarios have the same probability. However, based on the earnings multiple of other firms in the industry, financial markets believe that the value in each state of the economy is 20% less than Mr. Smith’s valuation. Also, financial markets believe that the probability of the low state is 60% and the probability of the other two states is 20%. The balance sheet consist of both tangible and intangible assets: in case of financial distress the intangible assets are lost, which amounts to 100mill. Currently, the firm does not have any debt. The discount rate of the firm is 10% and is independent of the capital structure.

a) Using or changing the capital structure of the firm, show how Mr. Smith can convince financial markets that their value assessment is wrong. After raising cash to his new house, Mr. Smith plans to maintain a 60% ownership share of the total value of the firm (i.e. he owns 60% of the shares and 60% of the debt in the firm)
b) Is capital structure the only way that Mr. Smith can signal to the markets?
c) Discuss whether it is possible for Mr. Smith to borrow from financial markets or should he approach a bank for financing.