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.

**Question 108** bond pricing, zero coupon bond, term structure of interest rates, forward interest rate

An Australian company just issued two bonds:

- A 1 year zero coupon bond at a yield of 10% pa, and
- A 2 year zero coupon bond at a yield of 8% pa.

What is the forward rate on the company's debt from years 1 to 2? Give your answer as an APR compounding every 6 months, which is how the above bond yields are quoted.

A stock is expected to pay the following dividends:

Cash Flows of a Stock | ||||||

Time (yrs) | 0 | 1 | 2 | 3 | 4 | ... |

Dividend ($) | 8 | 8 | 8 | 20 | 8 | ... |

After year 4, the dividend will grow in perpetuity at 4% pa. 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 increases the proportion of debt funding it uses to finance its assets by issuing bonds and using the cash to repurchase stock, leaving assets unchanged.

Ignoring the costs of financial distress, which of the following statements is **NOT** correct:

Select the most correct statement from the following.

'Chartists', also known as 'technical traders', believe that:

A young lady is trying to decide if she should attend university or not.

The young lady's parents say that she must attend university because otherwise all of her hard work studying and attending school during her childhood was a waste.

What's the correct way to classify this item from a capital budgeting perspective when trying to decide whether to attend university?

The hard work studying at school in her childhood should be classified as:

Calculate the price of a newly issued **ten** year bond with a face value of $**100**, a yield of **8**% pa and a fixed coupon rate of **6**% pa, paid **semi**-annually. So there are two coupons per year, paid in arrears every six months.

An equity index is currently at **4,800** points. The **1.5** year futures price is **5,100** points and the total required return is **6**% pa with continuous compounding. Each index point is worth $25.

What is the implied dividend yield as a continuously compounded rate per annum?

A stock has a beta of **1.5**. The market's expected total return is **10**% pa and the risk free rate is **5**% pa, both given as effective annual rates.

In the last 5 minutes, bad economic news was released showing a higher chance of recession. Over this time the share market **fell** by **1**%. The risk free rate was unchanged.

What do you think was the stock's historical return over the last 5 minutes, given as an effective 5 minute rate?

**Question 909** money market, bills

By convention, money market securities' yields are always quoted as: