In facing insolvency, a firm may offer prepackaged reorganization which offers its creditors less than what they are owed. However, the creditors may agree to the prepackaged reorganization. Please justify why?

finance

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1.       In facing insolvency, a firm may offer prepackaged reorganization which offers its creditors less than what they are owed. However, the creditors may agree to the prepackaged reorganization. Please justify why?

 

(Total 10 marks)

 

 

2.       An acquirer is offering to takeover a target with an offer price significantly above the current stock price of the target. Discuss why sometime the target’s managers still fights with the takeover attempt.

 

(Total 10 marks)

 

 

3.  WindCool Bank reports the following balance sheet and duration information:

 

Assets

Duration

Book Value

Market Value

 

 

 

 

Overnight Money

0.0

$3 Million

$3 Million

 

 

 

 

Mortgages

0.6

$7 Million

$8 Million

 

 

 

 

Loans

2.46

$18 Million

$20 Million

 

 

 

 

2-year Zero-coupon Bond

??

$8.5 Million

$9 Million

 

 

 

 

 

 

 

 

Liabilities

Duration

Book Value

Market Value

 

 

 

 

Checking Accounts

0.0

$9 Million

$9 Million

 

 

 

 

Short-term CD’s

1.0

$16 Million

$18 Million

 

 

 

 

Long-term CD’s

6.0

$8 Million

$9 Million

 

 

 

 

 

 

 

 

Equity

 

$3.5 Million

$4 Million

 

 

 

 

(i) Compute the duration of assets and liabilities respectively.

 

(7 marks)

 

(ii)   Advise whether the assets and liability are well matched for immunity to changing interest rates.

(6 marks)

 

(Total 13 marks)

4.       Evaluate the interpretation of equity ownership as being equivalent to owning a call option on the assets of the firm.

 

(Total 10 marks)

 

 

5.   Below is one future contract traded on the stock exchange, with corn as the underlying product. We have access to the closing prices of the future and the spot prices. Suppose

 

that Friday is the delivery time.

 

 

 

 

 

 

 

 


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