Bonds A and B are issued by the same company. They have the same face value, maturity, seniority and coupon payment frequency. The only difference is that bond A has a 5% coupon rate, while bond B has a 10% coupon rate. The yield curve is flat, which means that yields are expected to stay the same.

Which bond would have the higher current price?

The following equation is the Dividend Discount Model, also known as the 'Gordon Growth Model' or the 'Perpetuity with growth' equation.

###p_0=\frac{d_1}{r_\text{eff}-g_\text{eff}}###

Which expression is **NOT** equal to the expected capital return?

You're thinking of starting a new cafe business, but you're not sure if it will be profitable.

You have to decide what type of cups, mugs and glasses you wish to buy. You can have your cafe's name printed on them, or plain un-marked ones. For marketing reasons it's better to have the cafe name printed, but the plain un-marked cups, mugs and glasses maximise your:

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.

A mining firm has just discovered a new mine. So far the news has been kept a secret.

The net present value of digging the mine and selling the minerals is $**250** million, but $**500** million of new equity and $**300** million of new bonds will need to be issued to fund the project and buy the necessary plant and equipment.

The firm will release the news of the discovery and equity and bond raising to shareholders simultaneously in the same announcement. The shares and bonds will be issued shortly after.

Once the announcement is made and the new shares and bonds are issued, what is the expected increase in the value of the firm's assets ##(\Delta V)##, market capitalisation of debt ##(\Delta D)## and market cap of equity ##(\Delta E)##? Assume that markets are semi-strong form efficient.

The triangle symbol ##\Delta## is the Greek letter capital delta which means change or increase in mathematics.

Ignore the benefit of interest tax shields from having more debt.

Remember: ##\Delta V = \Delta D+ \Delta E##

A stock's required total return will **increase** when its:

**Question 625** dividend re-investment plan, capital raising

Which of the following statements about dividend re-investment plans (DRP's) is **NOT** correct?

Which of the below formulas gives the payoff at maturity ##(f_T)## from being **short** a future? Let the underlying asset price at maturity be ##S_T## and the locked-in futures price be ##K_T##.

An effective **monthly** return of 1% ##(r_\text{eff monthly})## is equivalent to an effective **annual** return ##(r_\text{eff annual})## of:

**Question 860** idiom, hedging, speculation, arbitrage, market making, insider trading, no explanation

Which class of derivatives market trader is **NOT** principally focused on ‘buying low and selling high’?