The US firm Google operates in the online advertising business. In 2011 Google bought Motorola Mobility which manufactures mobile phones.
Assume the following:
- Google had a 10% after-tax weighted average cost of capital (WACC) before it bought Motorola.
- Motorola had a 20% after-tax WACC before it merged with Google.
- Google and Motorola have the same level of gearing.
- Both companies operate in a classical tax system.
You are a manager at Motorola. You must value a project for making mobile phones. Which method(s) will give the correct valuation of the mobile phone manufacturing project? Select the most correct answer.
The mobile phone manufacturing project's:
A three year bond has a fixed coupon rate of 12% pa, paid semi-annually. The bond's yield is currently 6% pa. The face value is $100. What is its price?
The total return of any asset can be broken down in different ways. One possible way is to use the dividend discount model (or Gordon growth model):
###p_0 = \frac{c_1}{r_\text{total}-r_\text{capital}}###
Which, since ##c_1/p_0## is the income return (##r_\text{income}##), can be expressed as:
###r_\text{total}=r_\text{income}+r_\text{capital}###
So the total return of an asset is the income component plus the capital or price growth component.
Another way to break up total return is to use the Capital Asset Pricing Model:
###r_\text{total}=r_\text{f}+β(r_\text{m}- r_\text{f})###
###r_\text{total}=r_\text{time value}+r_\text{risk premium}###
So the risk free rate is the time value of money and the term ##β(r_\text{m}- r_\text{f})## is the compensation for taking on systematic risk.
Using the above theory and your general knowledge, which of the below equations, if any, are correct?
(I) ##r_\text{income}=r_\text{time value}##
(II) ##r_\text{income}=r_\text{risk premium}##
(III) ##r_\text{capital}=r_\text{time value}##
(IV) ##r_\text{capital}=r_\text{risk premium}##
(V) ##r_\text{income}+r_\text{capital}=r_\text{time value}+r_\text{risk premium}##
Which of the equations are correct?
Question 405 DDM, income and capital returns, no explanation
The perpetuity with growth formula is:
###P_0= \dfrac{C_1}{r-g}###
Which of the following is NOT equal to the total required return (r)?
Acquirer firm plans to launch a takeover of Target firm. The deal is expected to create a present value of synergies totaling $0.5 million, but investment bank fees and integration costs with a present value of $1.5 million is expected. A 10% cash and 90% scrip offer will be made that pays the fair price for the target's shares only. Assume that the Target and Acquirer agree to the deal. The cash will be paid out of the firms' cash holdings, no new debt or equity will be raised.
| Firms Involved in the Takeover | ||
| Acquirer | Target | |
| Assets ($m) | 60 | 10 |
| Debt ($m) | 20 | 2 |
| Share price ($) | 10 | 8 |
| Number of shares (m) | 4 | 1 |
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.
Question 700 utility, risk aversion, utility function, gamble
Mr Blue, Miss Red and Mrs Green are people with different utility functions.
Each person has $50 of initial wealth. A coin toss game is offered to each person at a casino where the player can win or lose $50. Each player can flip a coin and if they flip heads, they receive $50. If they flip tails then they will lose $50. Which of the following statements is NOT correct?
An effective semi-annual return of 5% ##(r_\text{eff 6mth})## is equivalent to an effective annual return ##(r_\text{eff annual})## of:
Question 719 mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate
A stock has an arithmetic average continuously compounded return (AALGDR) of 10% pa, a standard deviation of continuously compounded returns (SDLGDR) of 80% pa and current stock price of $1. Assume that stock prices are log-normally distributed. The graph below summarises this information and provides some helpful formulas.
In one year, what do you expect the median and mean prices to be? The answer options are given in the same order.
Question 881 Nixon Shock, Bretton Woods, foreign exchange rate, foreign exchange system history, no explanation
In the ‘Nixon Shock’ on August 15, 1971, the United States government:
Question 928 mean and median returns, mode return, return distribution, arithmetic and geometric averages, continuously compounding rate, no explanation
The arithmetic average continuously compounded or log gross discrete return (AALGDR) on the ASX200 accumulation index over the 24 years from 31 Dec 1992 to 31 Dec 2016 is 9.49% pa.
The arithmetic standard deviation (SDLGDR) is 16.92 percentage points pa.
Assume that the log gross discrete returns are normally distributed and that the above estimates are true population statistics, not sample statistics, so there is no standard error in the sample mean or standard deviation estimates. Also assume that the standardised normal Z-statistic corresponding to a one-tail probability of 2.5% is exactly -1.96.
If you had a $1 million fund that replicated the ASX200 accumulation index, in how many years would the mode dollar value of your fund first be expected to lie outside the 95% confidence interval forecast?
Note that the mode of a log-normally distributed future price is: ##P_{T \text{ mode}} = P_0.e^{(\text{AALGDR} - \text{SDLGDR}^2 ).T} ##