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.
Question 69 interest tax shield, capital structure, leverage, WACC
Which statement about risk, required return and capital structure is the most correct?
Some financially minded people insist on a prenuptial agreement before committing to marry their partner. This agreement states how the couple's assets should be divided in case they divorce. Prenuptial agreements are designed to give the richer partner more of the couples' assets if they divorce, thus maximising the richer partner's:
Acquirer firm plans to launch a takeover of Target firm. The deal is expected to create a present value of synergies totaling $105 million. A scrip offer will be made that pays the fair price for the target's shares plus 75% of the total synergy value.
| Firms Involved in the Takeover | ||
| Acquirer | Target | |
| Assets ($m) | 6,000 | 700 |
| Debt ($m) | 4,800 | 400 |
| Share price ($) | 40 | 20 |
| Number of shares (m) | 30 | 15 |
Ignore transaction costs and fees. Assume that the firms' debt and equity are fairly priced, and that each firms' debts' risk, yield and values remain constant. The acquisition is planned to occur immediately, so ignore the time value of money.
Calculate the merged firm's share price and total number of shares after the takeover has been completed.
The accounting identity states that the book value of a company's assets (A) equals its liabilities (L) plus owners equity (OE), so A = L + OE.
The finance version states that the market value of a company's assets (V) equals the market value of its debt (D) plus equity (E), so V = D + E.
Therefore a business's assets can be seen as a portfolio of the debt and equity that fund the assets.
Let ##\sigma_\text{V total}^2## be the total variance of returns on assets, ##\sigma_\text{V syst}^2## be the systematic variance of returns on assets, and ##\sigma_\text{V idio}^2## be the idiosyncratic variance of returns on assets, and ##\rho_\text{D idio, E idio}## be the correlation between the idiosyncratic returns on debt and equity.
Which of the following equations is NOT correct?
An equity index is currently at 4,800 points. The 1.5 year futures price is 5,100 points and the total required return is 6% pa with continuous compounding. Each index point is worth $25.
What is the implied dividend yield as a continuously compounded rate per annum?
Which of the following statements about futures and forward contracts is NOT correct?
Question 784 boot strapping zero coupon yield, forward interest rate, term structure of interest rates
Information about three risk free Government bonds is given in the table below.
| Federal Treasury Bond Data | ||||
| Maturity | Yield to maturity | Coupon rate | Face value | Price |
| (years) | (pa, compounding annually) | (pa, paid annually) | ($) | ($) |
| 1 | 0% | 2% | 100 | 102 |
| 2 | 1% | 2% | 100 | 101.9703951 |
| 3 | 2% | 2% | 100 | 100 |
Based on the above government bonds' yields to maturity, which of the below statements about the spot zero rates and forward zero rates is NOT correct?
Question 859 money supply, no explanation
The below table shows Australian monetary aggregates. Note that ‘M3’ is the sum of all the figures in the table and ‘ADI’ stands for Authorised Deposit-taking Institution such as a bank, building society or credit union.
| Australian Monetary Aggregates | ||||||
| March 2017, AUD billions | ||||||
| Currency | Current deposits with banks |
Certificates of deposit issued by banks |
Term deposits with banks |
Other deposits with banks |
Deposits with non-bank ADIs |
M3 |
| 69.3 | 271.6 | 207.2 | 562.3 | 838.7 | 36.9 | 1986.0 |
Source: RBA Statistical Table D3 Monetary Aggregates.
Which of the following statements is NOT correct?