Question 1 (short answer Questions)
1- A number of publicly traded firms pay no dividends yet investors are willing to buy shares in these firms.How is this possible?Does this violet our basic principle of stock valuation?Explain
2- Why are some risks diversifiable and some non-diversifiable? Give an example of each
3- As the CFO of Billybob's Auto Recycling,you plan to implement a system whereby customers who pay their bills on time will receive 10% rebate on their purchases.Those who pay earlier than required will receive a 15% rebate.Explain the impact of this proposal to the firm
4- Preferred stock,as a hybrid security,presents somewhat of a puzzle as to why they are used.What elements give rise to to the puzzle and how is it explained?
Question 2
Mr. Johnson is looking at creating a portfolio out of three possible securities Hyper Investments Ltd (HPR) , Tyson Technology Group (TTG) and 10-year Treasury Bonds. Mr. Johnson has collected the following information on the two risky securities
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HPR
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TTG
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Beta
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1.3
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0.95
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Standard deviation
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0.04837
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0.06753
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Additionally,Mr. Johnson knows that the expected return on the 10-year Treasury Bond( TB ) is expected to be 4.25% p.a. and the expected return on the market portfolio is expected to be 6.75% p.a. in the coming year.
Required:
1- What is the expected return on HPR and TTG over the coming year?
2- If Mr. Johnson decides to construct a portfolio invested 50% in HPR and 50% invested in TTG, what will be the portfolio's expected return and beta?
3- If Mr. Johnson decides to construct a portfolio invested 25% in HPR ,50% invested in TTG and 25% in the 10-year Treasury Bonds,what will be the portfolio's expected return and beta?
4- In the context of a two-asset portfolio,what are the factors that determine the expected return of the portfolio?
5- In the context of a two-asset portfolio,what are the factors that determine the standard deviation of the portfolio?
Question 3
The Ziggy Trim and Cut Company can purchase equipment on sale for $4,300.The asset has a three-year life,will produce a cash flow of $1,200 in the first and second year,and $3,000 in the third year,The interest rate is 12%.Calculate the project's payback.Also calculate the project's IRR. Should the project be taken? Check your answer by computing the project's NPV and expalin the reason of your decision.
Question 4
EDF Ltd is an Australian company,however its shareholders cannot utilise franking credit that they receive with dividends from the company.The company consistently generates EBIT of $3 million and pays income tax at the rate of 30%. It is currently all-equity financed with a cost of equity at 15% and its management is considering issuing $6,000,000 of bonds at an interest rate of 10% to repurchase some of the issued shares.
Required;
1- What is the value of the company with an all-equity capital structure?
2- What is the value of the company if it borrows the money and uses the proceeds to repurchase shares?
3- Distinguish between financial structure and capital structure.
4- How do agency costs and free cash flow relate to capital-structure policy?
5- Discuss the assumptions of irrelevance hypothesis of capital structure
Question 5
The Nantucket Nugget is unlevered and is valued at $640,000. Nantucket is currently deciding whether including debt in its capital structure would increase its value.The current cost of equity is 12%. Under consideration is issuing $300,000 in new debt with an 8% interest rate. Nantucket would repurchase $300,000 of stock with the proceeds of the debt issue. There are currently 32,000 shares outstanding and its effective marginal tax bracket is 34%. What will Nantucket's new weighted average cost of capital (WACC) be after the capital structure change?
Question 6
Williams Ltd has predicted that total earnings available for reinvestment or for dividend next year will be $1,500,000. The total earning available for reinvestment or for dividends over the next five-year period have been predicted to be $8,700,000.There are 1 million shares outstanding.
Required:
1- Determine the dividend per share to be paid next if the company enacts a 'constant dividend payout ratio of 40% ' policy for yearly outstanding.
2- Determine the dividend per share to be paid next year if the company enacts a 'stable dollar dividend targeted at a 40% of earnings over the five-year period' policy.
3- Determine the dividend per share to be paid next year if the company enacts a 'residual-dividend' policy. The company will need $1,360,000 for an investment project next year. The Company's debt-equity mix is 40% debt and 60% equity.
Question 7
1- What is meant by the term 'marking to market' in relation to futures?Explain with an example.
2- Distinguish between a call option and a put option
3- Draw a profit or loss graph for the purchase of a call option with an exercise price $80 for which a premium of $9 is paid . Identity the break-even point,the maximum loss and the maximum profit. What would be the outcome at expiry date if the underlying asset was then priced at $91?
4- Draw a profit loss graph for the seller (writer) of the call option in (c) above. Identify the break-even point,the maximum loss,the maximum profit and the final outcome based on the underlying asset price of $91 at the expiry.
Additional Requirements:
Show all necessary calculations / workings