Suppose today is November 30, 2017, and you are the head of sales in BHP Billiton,...

 

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Suppose today is November 30, 2017, and you are the head of sales in BHP Billiton, one of the biggest gold producers in the world. According to the present mining progress, in June 2018, the company will finish producing 35,000 troy ounce of gold for sale in the market. You have obtained the following gold futures information from the Chicago Mercantile Exchange (CME) web site: Month Open High Low (USD) (USD) (USD) 2017-Nov 1,308.00 1,308.10 1,281.30 2017-Dec 1,307.80 1,313.40 1,280.50 Required: Settle (USD) 1,284.50 1,284.60 2018-Jan 1,307.70 1,309.50 1,282.00 1.285.10 2018-Feb 1,309.30 1,314.10 1,281.70 1,285.70 2018-Apr 1,310.70 1,313.30 1,283.00 1,286.60 2018-Jun 1,310.90 1,313.30 1,283.00 1,287.30 1 contract = 100 troy ounce It is said that the US Federal Reserve is going to increase interest rate at the beginning of 2018. You are concerned that gold prices might decline in June 2018 and would like to lock in the revenue today. Ignore transaction cost. (a) Design a strategy with gold futures contracts to hedge BHP Billiton's risk exposure if gold price falls. (b) Based on the above gold futures settlement price information, determine the amount of revenue you would effectively lock in. (c) Suppose gold price is $1,100 per troy ounce in June 2018. Compute the profit or loss on your futures position. (7 marks) (6 marks) (7 marks) HK Express is Hong Kong's first and only low-cost carrier (LCC). Focusing on low fares and on-time reliability, HK Express has brought true competition to the Hong Kong market and surrounding region. HK Express is working on a plan to expand its business. The firm needs to raise $1 million to purchase its fixed assets and expects to earn a 16% return on these assets. Due to the preferential tax policy, HK Express does not need to pay any tax. However, the Chief Financial Officer is concerned with how to raise the required capital. It is assumed that the required rate of return for an all-equity firm in the airline industry is 10%. In addition, HK Express can obtain the loan at 6%. Required: (a) If the MM theory holds, calculate the value of HK Express without any debt financing. State your answer if HK Express borrows $0.5 million of debt. (b) If HK Express is all-equity financed, evaluate its return on equity and weighted average cost of capital, respectively. Advise your answer if the debt level changes to $1 million. Based on the calculation, discuss the impact of leverage on firm value. (c) Now it is assumed that HK Express needs to pay the corporate income tax of 20%. Assess the firm value of HK Express (1) with zero debt and (ii) with $0.5 million debt. (4 marks) (12 marks) (4 marks) Suppose today is November 30, 2017, and you are the head of sales in BHP Billiton, one of the biggest gold producers in the world. According to the present mining progress, in June 2018, the company will finish producing 35,000 troy ounce of gold for sale in the market. You have obtained the following gold futures information from the Chicago Mercantile Exchange (CME) web site: Month Open High Low (USD) (USD) (USD) 2017-Nov 1,308.00 1,308.10 1,281.30 2017-Dec 1,307.80 1,313.40 1,280.50 Required: Settle (USD) 1,284.50 1,284.60 2018-Jan 1,307.70 1,309.50 1,282.00 1.285.10 2018-Feb 1,309.30 1,314.10 1,281.70 1,285.70 2018-Apr 1,310.70 1,313.30 1,283.00 1,286.60 2018-Jun 1,310.90 1,313.30 1,283.00 1,287.30 1 contract = 100 troy ounce It is said that the US Federal Reserve is going to increase interest rate at the beginning of 2018. You are concerned that gold prices might decline in June 2018 and would like to lock in the revenue today. Ignore transaction cost. (a) Design a strategy with gold futures contracts to hedge BHP Billiton's risk exposure if gold price falls. (b) Based on the above gold futures settlement price information, determine the amount of revenue you would effectively lock in. (c) Suppose gold price is $1,100 per troy ounce in June 2018. Compute the profit or loss on your futures position. (7 marks) (6 marks) (7 marks) HK Express is Hong Kong's first and only low-cost carrier (LCC). Focusing on low fares and on-time reliability, HK Express has brought true competition to the Hong Kong market and surrounding region. HK Express is working on a plan to expand its business. The firm needs to raise $1 million to purchase its fixed assets and expects to earn a 16% return on these assets. Due to the preferential tax policy, HK Express does not need to pay any tax. However, the Chief Financial Officer is concerned with how to raise the required capital. It is assumed that the required rate of return for an all-equity firm in the airline industry is 10%. In addition, HK Express can obtain the loan at 6%. Required: (a) If the MM theory holds, calculate the value of HK Express without any debt financing. State your answer if HK Express borrows $0.5 million of debt. (b) If HK Express is all-equity financed, evaluate its return on equity and weighted average cost of capital, respectively. Advise your answer if the debt level changes to $1 million. Based on the calculation, discuss the impact of leverage on firm value. (c) Now it is assumed that HK Express needs to pay the corporate income tax of 20%. Assess the firm value of HK Express (1) with zero debt and (ii) with $0.5 million debt. (4 marks) (12 marks) (4 marks)

Answer rating: 100% (QA)

a To hedge BHP Billitons risk exposure if gold prices fall the company can use gold futures contracts Since BHP Billiton is expecting to produce 35000 troy ounces of gold in June 2018 they can sell go... View the full answer