Porto Berhad is an all-equity firm. The company is consideringthe following projects:
Project | Beta | Expected return |
Barcelona | 0.70 | 11% |
Juventus | 0.85 | 14% |
PSG | 1.30 | 16% |
Chelsea | 1.50 | 18% |
The T-bill rate is 9 percent and the expected return on themarket is 12 percent.
a.Evaluate which projects have higher expected return than thefirm’s 12 percent cost of capital
b. Assess which projects would be incorrectly accepted orrejected if the firm’s overall cost of capital were used as ahurdle rate.
Pension funds pay lifetime annuities to recipients. If a firmexpects to remain in business
indefinitely, its pension obligation will resemble a perpetuity.Suppose, therefore, that you are
managing a pension fund with obligations to make perpetualpayments of RM 2 million per year
to beneficiaries. The yield to maturity on all bonds is 16%.
c. If the duration of 5 year maturity bonds with coupon rates of12% (paid annually) is 4 years and the duration of 20 year maturitybonds with coupon rates of 6% (paid annually) is 11 years, how muchof each of these coupon bonds (in market value) will you want tohold to both fully fund and immunize your obligation?
(d) What will be the par value ofyour holdings in the 20 year coupon bond?
