A fairly priced stock has an expected return of 15% pa. Treasury bonds yield 5% pa and the market portfolio's expected return is 10% pa. What is the beta of the stock?
Your friend just bought a house for $1,000,000. He financed it using a $900,000 mortgage loan and a deposit of $100,000.
In the context of residential housing and mortgages, the 'equity' or 'net wealth' tied up in a house is the value of the house less the value of the mortgage loan. Assuming that your friend's only asset is his house, his net wealth is $100,000.
If house prices suddenly fall by 15%, what would be your friend's percentage change in net wealth?
Assume that:
- No income (rent) was received from the house during the short time over which house prices fell.
- Your friend will not declare bankruptcy, he will always pay off his debts.
Question 398 financial distress, capital raising, leverage, capital structure, NPV
A levered firm has zero-coupon bonds which mature in one year and have a combined face value of $9.9m.
Investors are risk-neutral and therefore all debt and equity holders demand the same required return of 10% pa.
In one year the firm's assets will be worth:
- $13.2m with probability 0.5 in the good state of the world, or
- $6.6m with probability 0.5 in the bad state of the world.
A new project presents itself which requires an investment of $2m and will provide a certain cash flow of $3.3m in one year.
The firm doesn't have any excess cash to make the initial $2m investment, but the funds can be raised from shareholders through a fairly priced rights issue. Ignore all transaction costs.
Should shareholders vote to proceed with the project and equity raising? What will be the gain in shareholder wealth if they decide to proceed?
Question 444 investment decision, corporate financial decision theory
The investment decision primarily affects which part of a business?
Which of the following statements about option contracts is NOT correct? For every:
Question 598 future, tailing the hedge, cross hedging
The standard deviation of monthly changes in the spot price of lamb is $0.015 per pound. The standard deviation of monthly changes in the futures price of live cattle is $0.012 per pound. The correlation between the spot price of lamb and the futures price of cattle is 0.4.
It is now January. A lamb producer is committed to selling 1,000,000 pounds of lamb in May. The spot price of live cattle is $0.30 per pound and the June futures price is $0.32 per pound. The spot price of lamb is $0.60 per pound.
The producer wants to use the June live cattle futures contracts to hedge his risk. Each futures contract is for the delivery of 50,000 pounds of cattle.
How many live cattle futures should the lamb farmer sell to hedge his risk? Round your answer to the nearest whole number of contracts.
Question 710 continuously compounding rate, continuously compounding rate conversion
A continuously compounded monthly return of 1% ##(r_\text{cc monthly})## is equivalent to a continuously compounded annual return ##(r_\text{cc annual})## of:
Itau Unibanco is a major listed bank in Brazil with a market capitalisation of equity equal to BRL 85.744 billion, EPS of BRL 3.96 and 2.97 billion shares on issue.
Banco Bradesco is another major bank with total earnings of BRL 8.77 billion and 2.52 billion shares on issue.
Estimate Banco Bradesco's current share price using a price-earnings multiples approach assuming that Itau Unibanco is a comparable firm.
Note that BRL is the Brazilian Real, their currency. Figures sourced from Google Finance on the market close of the BVMF on 24 July 2015.
A firm wishes to raise $50 million now. They will issue 5% pa semi-annual coupon bonds that will mature in 10 years and have a face value of $100 each. Bond yields are 5% pa, given as an APR compounding every 6 months, and the yield curve is flat.
How many bonds should the firm issue?