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You are currently doing research on Kensington Corporation, a levered firm that appears to be financially distressed. Your goal is to infer the probability that this firm goes into default and the estimated bond repayment in the default state using available market data. The firm has two bonds outstanding: Bond A and Bond B. Bond A is senior to Bond B, meaning that it has first claim to the cash flows generated by the firm. a) Bond B has a current price of $850, one year until maturity, a promised cash flow of $1,100 next year, and an expected return of 5 percent. If Kensington defaults, then Bond B pays a cash flow of zero (this is because Bond A claims all available cash flows first). What is the probability of default implied by this information? b) Bond A has a current price of $925, one year until maturity, a promised cash flow of $1,075 next year, and an expected return of 4 percent. The probability of default is given by your answer in part (a). Based on this information, what is the cash flow to Bond A in the default state? (the cash flow in the default state is also known as the recovery cash flow) step by step work without excel.
All of the following are methods of evaluating the risk of a project except which one?
external environmental scannbspin order to develop effective strategies it is critical to understand the marketplace
Assume that you have 40 years until retirement and have just started your first job. Once you retire, you anticipate that you will live for 30 additional years. Assume that you will require $100,000 per year to support yourself in retirement. How muc..
Suppose you think there is a 20% chance that EBI will fall to $18.00 in one year, a 60% chance its price will be unchanged, and a 20% chance that its price will rise to $24.00. Calculate the expected return on EBI.
Security Data Company has outstanding 50,000 shares of common stock currently selling at $40 per share. The firm most recently had earnings available for common stockholders of $120,000, but it has decided to retain these funds and is considering eit..
Consider the following annual returns of Estee Lauder and Lowe’s Companies: Estee Lauder Lowe’s Companies Year 1 23.7 % − 9.0 % Year 2 − 22.0 16.4 Year 3 17.9 4.5 Year 4 50.2 42.0 Year 5 − 17.1 − 12.0 Compute each stock’s average return, standard dev..
Calculate the yield to maturity of the bond. - What is the price of the bond if the yield to maturity is 2% higher. - What is the price of the bond if the yield to maturity is 2% lower.
Which one of the following would be the most common evidence of a debt when a sale is made on open account? Select one: a. Commercial draft b. Sight draft c. Banker's acceptance d. Promissory note e. Invoice
You have an 8 percent, $1,000 par bond that matures in 3 years. If the bond’s yield to maturity is 10 percent, Calculate this bond’s modified duration. Suppose the YTM goes down from 10 percent to 9.5 percent, calculate an estimate of the price chang..
Conduct research to find a company that is successfully using JIT systems in its operations. Describe the company briefly – product/services, locations, customers. Describe the company’s operations briefly – type of process
Suppose the returns on large-company stocks are normally distributed. The average annual return for large-company stocks from 1926 to 2007 was 13.4 percent and the standard deviation of those stocks for that period was 23.5 percent. Based on the hist..
What is the difference between YTM and IRR? - What is the YTM of a standard 6% level semiannual 10-year coupon bond that sells for its principal amount today.
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