Question 2 (20 marks) Consider the following capital structure Outstanding [swim] 4.0% lst Lien Senior Secured Bank Debt 250 6.0% 2nd Lien Senior Secured Bonds 350 10.0% Sr. Unsecured Bonds 700 Equity 200 None of the debt is amortizing, and annual maintenance capex is $100mm a) b) d) (8 marks) What is the EBITDA threshold where the company would enter bankruptcy, assuming it has no other sources of liquidity and cannot convince lenders to amend their claims? (5 marks) Suppose companies in this industry are typically valued at 4x EBITDA. What would be your expected recovery if you were a Sr. Unsecured Bondholder, assuming no priority claims or legal expenses? (2 marks) Suppose the company is sold to a PE rm after bankruptcy for a multiple of 3x EBITDA, despite the industry average being 4x EBITDA. Why might it have sold at a discount? (5 marks) What multiple would the company need to sell for in bankruptcy to give 50% recovery to the equity? Quution 3 (10 marks) Using the DVOl (or modified duration), answer the following questions: a) b) (5 marks) A bond portfolio manager has $25 million invested in a 5 year zero coupon bond and $100 million invested in a 10 year zero coupon bond. What is the dollar impact of a one basis point parallel shift upwards in the yield curve on the value of the portfolio? (5 marks) Assume now that the bond portfolio contains coupon paying bonds (total of $125 million face value) and the portfolio's modified duration is equal to 8. Using a 10year zero coupon bond, show how the portfolio manager can hedge the portfolio against interest rate risk (explain how many 10 year zero coupon bonds the portfolio should buy or go short) such that the profit or loss remains the same