Reference no: EM13833470

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

	HPR	TTG
Beta	1.3	0.95
Standard deviation	0.04837	0.06753

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