Porto Berhad is an all-equity firm. The company is considering the following pro
ID: 2337999 • Letter: P
Question
Porto Berhad is an all-equity firm. The company is considering the 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 the market is 12 percent.
a.Evaluate which projects have higher expected return than the firm’s 12 percent cost of capital
(5 marks)
b. Assess which projects would be incorrectly accepted or rejected if the firm’s overall cost of capital were used as a hurdle rate.
(5 marks)
Pension funds pay lifetime annuities to recipients. If a firm expects 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 perpetual payments 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 of 12% (paid annually) is 4 years and the duration of 20 year maturity bonds with coupon rates of 6% (paid annually) is 11 years, how much of each of these coupon bonds (in market value) will you want to hold to both fully fund and immunize your obligation?
(5 marks)
(d) What will be the par value of your holdings in the 20 year coupon bond?
(5 marks)
Project
Beta
Expected return
Barcelona
0.70
11%
Juventus
0.85
14%
PSG
1.30
16%
Chelsea
1.50
18%