For a price of $95, Sherylanne will sell you a share which is expected to pay its first dividend of $10 in 7 years (t=7), and will continue to pay the same $10 dividend every year after that forever.
The required return of the stock is 10% pa.
The required return of a project is 10%, given as an effective annual rate. Assume that the cash flows shown in the table are paid all at once at the given point in time.
What is the Net Present Value (NPV) of the project?
| Project Cash Flows | |
| Time (yrs) | Cash flow ($) |
| 0 | -100 |
| 1 | 11 |
| 2 | 121 |
A company has:
- 50 million shares outstanding.
- The market price of one share is currently $6.
- The risk-free rate is 5% and the market return is 10%.
- Market analysts believe that the company's ordinary shares have a beta of 2.
- The company has 1 million preferred stock which have a face (or par) value of $100 and pay a constant dividend of 10% of par. They currently trade for $80 each.
- The company's debentures are publicly traded and their market price is equal to 90% of their face value.
- The debentures have a total face value of $60,000,000 and the current yield to maturity of corporate debentures is 10% per annum. The corporate tax rate is 30%.
What is the company's after-tax weighted average cost of capital (WACC)? Assume a classical tax system.
Question 407 income and capital returns, inflation, real and nominal returns and cash flows
A stock has a real expected total return of 7% pa and a real expected capital return of 2% pa.
Inflation is expected to be 2% pa. All rates are given as effective annual rates.
What is the nominal expected total return, capital return and dividend yield? The answers below are given in the same order.
Question 434 Merton model of corporate debt, real option, option
A risky firm will last for one period only (t=0 to 1), then it will be liquidated. So it's assets will be sold and the debt holders and equity holders will be paid out in that order. The firm has the following quantities:
##V## = Market value of assets.
##E## = Market value of (levered) equity.
##D## = Market value of zero coupon bonds.
##F_1## = Total face value of zero coupon bonds which is promised to be paid in one year.
What is the payoff to debt holders at maturity, assuming that they keep their debt until maturity?
Question 662 APR, effective rate, effective rate conversion, no explanation
Which of the following interest rate labels does NOT make sense?
Question 664 real and nominal returns and cash flows, inflation, no explanation
What is the present value of real payments of $100 every year forever, with the first payment in one year? The nominal discount rate is 7% pa and the inflation rate is 4% pa.
Question 745 real and nominal returns and cash flows, inflation, income and capital returns
If the nominal gold price is expected to increase at the same rate as inflation which is 3% pa, which of the following statements is NOT correct?
Question 810 CAPM, systematic and idiosyncratic risk, market efficiency
Examine the graphs below. Assume that asset A is a single stock. Which of the following statements is NOT correct? Asset A:
Question 858 indirect security, intermediated finance, no explanation
Which of the following transactions involves an ‘indirect security’ using a ‘financial intermediary’?