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Rutgers Business School – Newark, Fall 2019
Analysis of Fixed Income (29:390:468 Section 2)
Professor Francis K.W. Ng
Time: Tuesday
11:30 AM – 12:50 AM
11:30 AM – 12:50 AM
Class Room: 1WP-512
Mobile: 201-463-8362 (prefer text over email)
Office Hours: Tuesday & Thursday 1:00 PM – 2:00 PM
Office: 1WP-1150
Course Overview and Objectives
This course introduces various types of fixed income product including Money Market,
Treasury, Municipal, Investment Grade / High Yield, ABS, MBS, CDO and CMO. It focuses
on various aspects of bond analytics and how bonds are combined with derivatives in order
to solve real world problems.
This course is fundamental to students who are serious in pursuing a career relating to
fixed income products.
Students are expected to use the Bloomberg Terminal. Students should be familiar with
basic algebra.
Course Materials
All lecture notes, power points and work problems will be distribute via Blackboard. The
lecture notes are written by Professor Ng. The reference book is optional for the class.
Reference textbook (Optional): Bond Markets, Analysis, and Strategies, 9th edition, by
Frank J. Fabozzi, Publisher: Pearson, Prentice Hall. (The 7th or 8th edition of this book
will suffice)
Mid-Term Exam
Final Exam
Bonus Points
1 point for 90% – 100% attendance (taken on random days)
2 points for Active Participation
Course Outline
Lecture Note
Week 1
Week 6
Week 7
Loan Basics
Loan Cash Flows
Bond Basics
Bond Basic Math
Bond Yield Basics
Bond Yield Misc.
Money Market Securities
Role of Federal Reserve
Repo Market
Mid-Term Exam
Mini Lecture 1
Mini Lecture 2
Mini Lecture 3
Mini Lecture 4
Mini Lecture 5
Mini Lecture 6
Mini Lecture 7
Mini Lecture 9
Mini Lecture 8
Week 8
Week 9
Week 10
Week 11
Week 12
Week 13
Week 14
Week 15
Yield Curve, Inversion and Negative Rates
Forward Rates and Swap Rates
Bond Price Volatility, Convexity, Hedging
Bond + Derivatives, Structured Products
Securitized Products (ABS, CDO, MBS, CMO)
Securitized Products and Risks
Credit Products
Final Exam
Mini Lecture 10
Mini Lecture 11
Mini Lecture 12
Mini Lecture 13
Mini Lecture 14
Mini Lecture 15
Mini Lecture 16
Week 2
Week 3
Week 4
Week 5
Rutgers Business School
29:390:330:02 – Corporate Finance
Prof. Lisa Kaplowitz
Final Exam – Spring 2019
Part A – Analysis (40 points)
You are required to show all work to receive full credit.
If using a financial calculator, please list your inputs and the function used. If using excel, please use the sheet
on Blackboard titled “Final Backup” and submit at end of exam. If using paper, please detail all calculations.
1. Happiness Corp. (“Happy”) is a manufacturer of stress relief products that improve mental health.
Given the recent success of IPOs, Happy is looking to take itself public and is trying to figure out
what the price per share should be. Based on the information below, please complete a discounted
cash flow analysis to determine the appropriate price per share of Happy:

Revenue is expected to be $101.5 million in the 2019 (year 1) and grow 20% in 2020, 16% in 2021, 12%
in 2022 and 10% in the last year.

Variable cost is expected to be 50% of revenue.

Fixed cost (excluding depreciation) is expected to be $32,000,000 each year.

Depreciation expense is expected to be $8,000,000 each year.

Maintenance capex is expected to be $6,000,000 each year.

Net working capital was $9,000,000 in 2018 and is expected to be $11,000,000 in 2019, and grow at the
same rate as revenue thereafter.

Taxes are projected to be 20%.

This company will, hopefully, continue forever. Assume the long-term perpetual growth rate is 4%.
Additionally, here is a summary of the capital structure for North Pole Enterprises, Inc.:
Capitalization Table
Senior Notes
Common stock
Other info:
Treasury bills yield
E(r) on market
Book Value
Price per
Outstanding Coupon Rate

Based on the DCF, what is the Happy’s implied stock price?

2. (15 points)
Happy also wants to look at how its competitors are trading in the public markets before deciding on the price
it will “go public.” Based on the following information, what would be Happy’s implied stock price if its 2019
EPS is $0.76 per share?
Feelings, Inc.
Be Well, Inc.
Alive and Kicking, Corp.
2019 P/E
3. (5 points)
What is your recommended IPO price based on 1 & 2 above, and why?
4. (20 points)
As an alternative to going public, Happy is entertaining a cash acquisition by Om Corp. (“Om”), a maker of
yoga mats, essential oils and other stress reducing products. The stand-alone value of Happy is
approximately $280 million, based on the discounted cash flow analysis. The stand-alone value of Om is
approximately $1,500 million. Om believes that combining the companies could generate the following
after-tax benefits/costs: additional revenue of $8 million, $6 million of cost saving and $1.5 million of
severance payments.

What is the most that OM should pay for Happy?

What is the least Happy should accept?

What is the value of the combined firm?

Please list 1 pro and 1 con Happy should consider before entering into this transaction.
5. (20 points)
Now assume that Om Corp. is an all equity firm with a 14.0% cost of capital. The company is expected to
maintain a perpetual cash flow. It is looking to add leverage and change its capital structure to 65% equity,
35% debt. If the cost of debt is 6.2%, there is no risk of default, and the tax rate is 20%, what is the new
levered cost of equity and WACC of Om?
5a. What are 2 conditions that must be satisfied to make this capital structure decision irrelevant?
1. Stock Price = $25.86; WACC = 14.04%
2. Implied stock price = $23.10
3. Qualitative
4. A. $292.5 m
B. $280.0 m
C. $1,792.5 m
D. Qualitative
5. ReL = 17.36%; WACC = 13.02%
a. Qualitative

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