## ccra

agarwalla.harsha
Posts: 7
Joined: Tue Jul 14, 2015 6:55 am

### ccra

a) what would be the forward rate for a period of 2 years, 2 years from now for the aaa corporate bond issued by zebrainc. if the spot rate for years 1,2,3,4 are 3%, 4%, 5%, 6% respectively.

b) the financial records of jennings inc show current assests of rs600, and net fixed assets of rs1500, the firm has rs900 in liabilities which is the amount the firm would need to pay to extinguish its debt. the firm estimates that it could sell its current assets for rs 550 and fixed assets for rs 1700. what is the market value of its stockholders equity?

edupristine
Finance Junkie
Posts: 946
Joined: Wed Apr 09, 2014 6:28 am

### Re: ccra

a) Given spot rates of: 1-year = 3%, 2-year = 4%, 3-year = 5%, and 4-year = 6%, we can calculate
2y2y i.e forward rate for a period of 2 years, 2 years from now

(1+S4 )^4 = (1 + S2) ^2 (1 + 2y2y)^2
[(1+S4 )^4 / (1+S2)^2 ] = (1 + 2y2y)^2
{[(1+S4 )^4 / (1+S2)^2]^(1/2)} -1 = 2y2y
Where,
S4 = Spot rate of 4th year, S2= Spot rate of 1st year

{[(1.06)^4 / (1.04)^2] ^(1/2) }- 1 = 2y2y = 0.08038

= 8.04%

B) According to the Equation,
Assets = Liabilities + Shareholders Equity
FA + CA = Liabilities + Shareholders equity
Rs 600 + 1500 = Rs 900 + Shareholders Equity
Rs 2100 – Rs 900 = Shareholders Equity
Rs 1200 = Shareholders Equity
So, Shareholders Equity would be 1200
But now, the market value of Current assets reduced to Rs 550 and market value of Fixed assets increased to Rs 1700. So, re-assessing the equation again
Rs 550 + Rs 1700 = 900 + Shareholder’s Equity
Rs 2250 – Rs 900 = Shareholders Equity
Rs 1350 = Shareholders Equity
So the market value of Shareholder’s equity will now be Rs 1350.