You are analysing a firm in three different businesses - restaurants, grocery stores and real estate. The firm has come up with bottom-up estimates of duration in each of these sectors: Sector Duration Restaurants 7.1 years Grocery Stores 2.9 years Real Estate 8.1 years The firm derives half its value from real estate, and a quarter each from restaurants and grocery stores.

 
  i) Estimate the duration of the firm's assets. (4 marks)

ii) Under what conditions would you issue a different kind of debt for each business separately? (4 marks)

iii) Assume that the firm has existing debt of $1 billion with duration of 4 years. If it plans to issue $1.5 billion in additional debt, what duration would you recommend for the debt to match up to the duration of the assets?

e) Briefly explain why stock options are often used as compensation for executives and comment on any drawbacks of stock option based compensation.

Answer rating: 100% (QA)

i To estimate the duration of the firms assets we need to calculate a weighted average duration using the weights of each sectors contribution to the ... View the full answer