A stock is expected to pay the following dividends:
| Cash Flows of a Stock | ||||||
| Time (yrs) | 0 | 1 | 2 | 3 | 4 | ... |
| Dividend ($) | 0.00 | 1.15 | 1.10 | 1.05 | 1.00 | ... |
After year 4, the annual dividend will grow in perpetuity at -5% pa. Note that this is a negative growth rate, so the dividend will actually shrink. So,
- the dividend at t=5 will be ##$1(1-0.05) = $0.95##,
- the dividend at t=6 will be ##$1(1-0.05)^2 = $0.9025##, and so on.
The required return on the stock is 10% pa. Both the growth rate and required return are given as effective annual rates.
What is the current price of the stock?
A company has:
- 10 million common shares outstanding, each trading at a price of $90.
- 1 million preferred shares which have a face (or par) value of $100 and pay a constant dividend of 9% of par. They currently trade at a price of $120 each.
- Debentures that have a total face value of $60,000,000 and a yield to maturity of 6% per annum. They are publicly traded and their market price is equal to 90% of their face value.
- The risk-free rate is 5% and the market return is 10%.
- Market analysts estimate that the company's common stock has a beta of 1.2. The corporate tax rate is 30%.
What is the company's after-tax Weighted Average Cost of Capital (WACC)? Assume a classical tax system.
Your poor friend asks to borrow some money from you. He would like $1,000 now (t=0) and every year for the next 5 years, so there will be 6 payments of $1,000 from t=0 to t=5 inclusive. In return he will pay you $10,000 in seven years from now (t=7).
What is the net present value (NPV) of lending to your friend?
Assume that your friend will definitely pay you back so the loan is risk-free, and that the yield on risk-free government debt is 10% pa, given as an effective annual rate.
Which firms tend to have low forward-looking price-earnings (PE) ratios?
Only consider firms with positive earnings, disregard firms with negative earnings and therefore negative PE ratios.
A European call option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars.
What is an expression for the payoff at maturity ##(f_T)## in dollars from owning (being long) the call option?
Question 433 Merton model of corporate debt, real option, option, no explanation
A risky firm will last for one period only (t=0 to 1), then it will be liquidated. So it's assets will be sold and the debt holders and equity holders will be paid out in that order. The firm has the following quantities:
##V## = Market value of assets.
##E## = Market value of (levered) equity.
##D## = Market value of zero coupon bonds.
##F_1## = Total face value of zero coupon bonds which is promised to be paid in one year.
What is the payoff to equity holders at maturity, assuming that they keep their shares until maturity?
Question 545 income and capital returns, fully amortising loan, no explanation
Which of the following statements about the capital and income returns of a 25 year fully amortising loan asset is correct?
Assume that the yield curve (which shows total returns over different maturities) is flat and is not expected to change.
Over the 25 years from issuance to maturity, a fully amortising loan's expected annual effective:
Question 574 inflation, real and nominal returns and cash flows, NPV
What is the present value of a nominal payment of $100 in 5 years? The real discount rate is 10% pa and the inflation rate is 3% pa.
Which of the following statements about the Basel 3 minimum capital requirements is NOT correct? Common equity tier 1 (CET1) comprises the highest quality components of capital that fully satisfy all of the following characteristics: