PRACTICA

VALORACION ECONOMICA DE EMPRESAS

Question 1.- The Trojan Pizza Company is contemplating investing $1 million in four new outlets
in Los Angeles. Andrew Lo, the firm’s Chief Financial Officer (CFO), has estimated that the
investments will pay out cash flows of $200,000 per year for nine years and nothing thereafter.
(The cash flows will occur at the end of each year and there will be no cash flow after year 9 Mr.
Lo has determined that the relevant discount rate for this investment is 15 percent. This is the
rate of return that the firm can earn at comparable projects. What is the NPV of Trojan Pizza
Company make the investments in the new outlets?

Question 2.- A bond with an 8% semi-annual coupon and 10-year maturity is currently priced at
$904.52 to yield 9.5%. If the yield declines to 9%, the bond’s price will increase to $934.96, and
if the yield increases to 10%, the bond’s price will decrease to $875.38. Estimate the percentage
price change for a 100 basis point change in rates.
Question 3.- Use the following Treasury bond prices to answer the next questions. Assume the
prices are for settlement on June 1, 2005, today’s date. Assumes a semiannual coupon payments:

Coupon Maturity Price

7.50% 12/1/2005 102-9
12.375% 6/1/2006 107-15
6.75% 12/1/2006 104-15
5.00% 6/1/2007 102-9

The discount rates associated with the bonds maturing in December 2005 and June 2006, are
closest to:

Question 4.- A two-year zero-coupon bond issued by corporate XYZ is currently rated A. One
year from now XYZ is expected to remain at A with 85% probability, upgraded to AA with 5%
probability, and downgraded to BBB with 10% probability. The risk free rate is flat at 4%. The
credit spreads are flat at 40, 80, and 150 basis points for AA, A, and BBB rated issuers,
respectively. All rates are compounded annually. Estimate the expected value of the zero-coupon
bond one year from now (for USD 100 face amount).

Question 5.- What is the price of a common stock that paid a dividend of $us 10 the previous
year. Additionally according to the data presented by the research department, is expecting that
this dividend will grow up at an annual rate of 7% for the next five years and a 13% onwards.
Assuming an annual return of 14%, what is the price of this common stock today?

Question 6.- The covariance of the market's returns with the stock's returns is 0.008. The
standard deviation of the market's returns is 0.08, and the standard deviation of the stock's returns
is 0. 11. What is the correlation coefficient of the returns of the stock and the returns of the market?

Question 7.- Which of the following available portfolios most likely falls below the Markowitz
efficient frontier?

Portfolio Expected Return Expected Standard Deviation

1 7% 14%
2 9% 26%
3 12% 22%

Question 8.- Using the following information, what is the firm`s free cash flows, cash change for
the period and the balance on cash and banks.

Net Income 120

Banks and Cash (last Year) 25
Decrease in Account Receivables 20
Decrease in wages payables 5
Depreciation 25
Increase in accounts payable 7
Increase in deferred tax liabilities 15
Increase in inventory 10
Interests payment 10
Issuing Company´s Bonds 50
Long Term Debt Payment 129
Preferent Dividend Payment 5
Profit from the sale of land 25
Purchase of T Bonds 30
Repurchase of Preferent Stocks 35