For a price of $6, Carlos will sell you a share which will pay a dividend of $1 in one year and every year after that forever. The required return of the stock is 10% pa.
Question 48 IRR, NPV, bond pricing, premium par and discount bonds, market efficiency
The theory of fixed interest bond pricing is an application of the theory of Net Present Value (NPV). Also, a 'fairly priced' asset is not over- or under-priced. Buying or selling a fairly priced asset has an NPV of zero.
Considering this, which of the following statements is NOT correct?
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.
A 30-day Bank Accepted Bill has a face value of $1,000,000. The interest rate is 2.5% pa and there are 365 days in the year. What is its price now?
Which of the following statements about the weighted average cost of capital (WACC) is NOT correct?
Question 345 capital budgeting, break even, NPV
| Project Data | ||
| Project life | 10 yrs | |
| Initial investment in factory | $10m | |
| Depreciation of factory per year | $1m | |
| Expected scrap value of factory at end of project | $0 | |
| Sale price per unit | $10 | |
| Variable cost per unit | $6 | |
| Fixed costs per year, paid at the end of each year | $2m | |
| Interest expense per year | 0 | |
| Tax rate | 30% | |
| Cost of capital per annum | 10% | |
Notes
- The firm's current liabilities are forecast to stay at $0.5m. The firm's current assets (mostly inventory) is currently $1m, but is forecast to grow by $0.1m at the end of each year due to the project.
At the end of the project, the current assets accumulated due to the project can be sold for the same price that they were bought. - A marketing survey was used to forecast sales. It cost $1.4m which was just paid. The cost has been capitalised by the accountants and is tax-deductible over the life of the project, regardless of whether the project goes ahead or not. This amortisation expense is not included in the depreciation expense listed in the table above.
Assumptions
- All cash flows occur at the start or end of the year as appropriate, not in the middle or throughout the year.
- All rates and cash flows are real. The inflation rate is 3% pa.
- All rates are given as effective annual rates.
Find the break even unit production (Q) per year to achieve a zero Net Income (NI) and Net Present Value (NPV), respectively. The answers below are listed in the same order.
An investor bought a 10 year 2.5% pa fixed coupon government bond priced at par. The face value is $100. Coupons are paid semi-annually and the next one is in 6 months.
Six months later, just after the coupon at that time was paid, yields suddenly and unexpectedly fell to 2% pa. Note that all yields above are given as APR's compounding semi-annually.
What was the bond investors' historical total return over that first 6 month period, given as an effective semi-annual rate?
An investor owns a portfolio with:
- 80% invested in stock A; and
- 20% invested in stock B.
Today there was a:
- 10% rise in stock A's price; and
- No change in stock B's price.
No dividends were paid on either stock. What was the total historical portfolio return on this day? All returns above and answer options below are given as effective daily rates.
On 1 February 2016 you were told that your refinery company will need to purchase oil on 1 July 2016. You were afraid of the oil price rising between now and then so you bought some August 2016 futures contracts on 1 February 2016 to hedge against changes in the oil price. On 1 February 2016 the oil price was $40 and the August 2016 futures price was $43.
It's now 1 July 2016 and oil price is $45 and the August 2016 futures price is $46. You bought the spot oil and closed out your futures position on 1 July 2016.
What was the effective price paid for the oil, taking into account basis risk? All spot and futures oil prices quoted above and below are per barrel.
Question 924 foreign exchange rate, forward foreign exchange rate, arbitrage, forward interest rate, no explanation
Suppose that the yield curve in the United States of America and Australia is flat and that the current:
- USD federal funds rate is 1% pa;
- AUD cash rate is 1.5% pa;
- Spot AUD exchange rate is 1 USD per AUD;
- One year forward AUD exchange rate is 0.97 USD per AUD.
You suspect that there’s an arbitrage opportunity.
Which one of the following statements about the potential arbitrage opportunity is NOT correct?