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  3. The University Of York (UOY)
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  5. Corporate finance and derivatives studies (ECO00012H)

Lecture notes

Seminar slides for Seminar 3
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These were the slides provided with solutions for Seminar 1, much more in-depth than the seminar solutions provided by the lecturer. Download these if you're struggling to understand the seminar work! (the slides were augmented due to a fault in the previous version)

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  • May 19, 2023
  • 2
  • 2022/2023
  • Lecture notes
  • N/a
  • Seminar 3

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PROBLEM 1(C): SOLUTION
“Unlevered equity” = equity in a firm with no debt = equity in a firm without leverage
𝑋 = 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡𝑠 𝑖𝑛 1 𝑦𝑒𝑎𝑟 = 𝑃𝑟1 × 𝐴𝑠𝑠𝑒𝑡𝐵𝑒𝑠𝑡 𝐶𝑎𝑠𝑒 × (1 − 𝑃𝑟1 ) × 𝐴𝑠𝑠𝑒𝑡𝑠𝑊𝑜𝑟𝑠𝑡 𝐶𝑎𝑠𝑒
𝑋
𝑌 = 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦1 𝑦𝑒𝑎𝑟 =
1+𝑟
Without leverage:
𝑋−𝑌 44−40 4
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 = × 100 = × 100 = × 100 = 10%
𝑌 40 40

“levered equity” = equity in a firm with debt = equity in a firm with leverage
𝐷𝑒𝑏𝑡 = $20 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝑋 𝐷𝑒𝑏𝑡
𝑍 = 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦1 𝑦𝑒𝑎𝑟 = −
1+𝑟 1 + 𝑟𝑓
With leverage:
𝑋 − 𝐷𝑒𝑏𝑡 − 𝑍 44 − 20 − 20.952 24 − 20.952
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 = × 100 = × 100 = ×1
𝑍 20.952 20.952
3.048
= × 100 = 14.55%
20.952

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