These are additional homework assignments that expand upon the concepts from class. They are not included in your packet. Most lecture outlines contain extra problems at the end. They also contain answers. These give you a chance to work through the concepts from class, but with different examples. In some cases, I make one assumption in class and a different assumption in the supplementary exercise. This is a good way to learn what the effect of different assumptions is. If I develop additional exercises during the term, I will post them here.
- Lecture 4:
- Risk and Return of Government Bonds. Working through the enclosed numerical example will help you understand how the risk and return on government bonds and the risk free rate are related. These questions should also provide some practice for calculating discounted values and rates of return.
- Bond Pricing. This exercise works through an example of how to price bonds given the term structure of interest rates (similar to the supplementary exercise in Lecture 1). It is also a good review of forward rates (from Lecture 2). This exercise is also good practice for understanding interest rates that we will use when we do the GM case.
- Asset, Debt, and Equity Betas. As you lever up the firm, the debt and equity change. These exercises let you explore the mechanics of how this works. It asks you to simultaneously calculate the value of the assets, debt, and equity at the same time that you calculate the betas. As you increase the leverage of the firm, you will see how the promised rate on debt, the expected rate on debt, as well as the debt and equity change. You will need the enclosed spreadsheet. Only after you have calculated your own numbers can you look at my written answers and spreadsheet.
- Discount Rates for Leases. Xerox recently was forced to restate their earnings and revenues. Their use of discount rates had allowed them to increase the revenues they reported from their Mexican copier leasiinb business. This question examines the numbers behind the WSJ article.
- Lecture 6: This exercise asks you to value the coffee cafe example from Lecture 5. However, as part of the valuation, you need to estimate the project beta. If you are unclear on why we used different discoutn rates at different points of the valuation, this exercise should help. To complete it, you will need the companion spreadsheet.
- Lecture 7:
- Dividend Announcements. This exercise lets you calculate the numbers behind the examples in Lecture 7. You can use it to see how the stock price responds to dividend annoucnements. You can change how this year's earnings surprise is related to next year's earnings surprise and see how this changes the stock price reaction. You can use the enclosed spreadsheet to check your answers.
- Lecture 8:
- Capital Structure Irrelevance When Debt is Risky. In class, we increased the firm's debt from $0 to $30. In the supplementary exercise, you can increase the leverage to $60. You should work through this assignment before Lecture 10. You can use the companion spreadsheet to check your answers.
- Betas. As a firm changes its leverage, its equity and debt change as well. This spreadsheet and exercise let you calculate the asset, debt, and equity for different levels of debts. If you are still having trouble with promised return, return in default, and the expected return on debt, this exercise might help. This is the same exercise as listed under Lecture 2. Once you have completed it, you can check with my answers.
- Lecture 9: The value of the interest rate tax shield.
- Liquidation Assumption. This exercise changes my assumption of what happens when the firm defaults. In this exercise, I assume that the firm is liquidated if it defaults.
- Tax Shield Beta. This example extends the one you started in Lecture 2. In that example, you were given the distribution of asset cashflows and the market return across 20 states. You were asked to value the assets of the firm and its debt and equity (in an M&M world). In this example, add the value of the debt tax shield. You will estimate the betas in the process. (To be completed)
- Lecture 11:
- Capital Budgeting and the Cost of Underpricing. If managers have information that the market does not, sometimes the equity will be mispriced. This means that sometimes managers will optimally choose not to issue securities and invest in positive NPV projects, since the losses on the equity sale swamp the gains on the investment project. We looked at one such example in Lecture 12. This exercise allows you to work through two additional examples. You will also need the companion spreadsheet to complete this assignment.
- Capital Budgeting for Firms with a Debt Overhang. We have examined the effect on equity holders' wealth from taking a new project financed by new equity. In this exercise, I want you to look at a similar problem. The new project can be financed by equity or debt - your choice. However, the firm currently has debt outstanding. This makes the problem more interesting.
- Nash Equilibrium. In your microeconomics and/or game theory classes, you studied the Nash equilibrium. The equilibrium we derived in class (where the firm bypasses a positive NPV project) is a Nash equilibrium. This exercise will help you figure out the strategies and demonstrate that there is a unique Nash equilibrium in this game.
- Lecture 13:
- PERCS. In class, I showed you how to think of exotic securities, such as convertible bonds, as portfolios of the firm's debt, equity, and options. In this example, you construct an exotic security with these building blocks. This way, you can actually "issue" a security without the help of the firm.