What does the economist mean by this statement

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Finance Questions -

Question 1 - ABC Ltd. has issued Ordinary Share Capital comprising 4 million shares of £1 nominal value.

It is forecast to earn £1.5 million profit in each of 2020 and 2021. In 2022 this rises to £2 million, remaining at that level for 2023 and 2024. In 2025 the profit rises to £2.5 million, and will remain at that level thereafter. ABC Ltd's cost of capital is 9%.

Required: a) Assuming that today is 1st Jan 2020, calculate the value of the company and of one ordinary share, using a 'discounted cash flow' approach. For the purpose of this question you may assume that profit equals cash flow.

b) The Statement of Financial Position as at 31st December 2019 shows that the net assets (and therefore the capital plus reserves) of the same company are equal to only £17.1 million. Explain two reasons why this so-called 'book value' of a company is often lower than the valuation arrived at by discounting future revenue streams

Question 2 - Brazil is currently producing too many soy beans, a lot more than the socially optimal quantity."

What does the economist mean by this statement? Use a diagram to explain your answer.

Question 3 - Mr Finnigan holds shares in S plc. He wishes to diversify his investment by selling half of those shares, and re-investing the money elsewhere. He has identified three possible companies in which to buy shares. Below are the correlation co-efficients between historical returns of shares in S plc and the historical returns of shares in those three companies:

Company	Correlation co-efficient
F plc	Negative 0.42
J plc	Zero
W plc	Positive 0.26

Reference no: EM132519607

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