A company has:
- 140 million shares outstanding.
- The market price of one share is currently $2.
- The company's debentures are publicly traded and their market price is equal to 93% of the face value.
- The debentures have a total face value of $50,000,000 and the current yield to maturity of corporate debentures is 12% per annum.
- The risk-free rate is 8.50% and the market return is 13.7%.
- Market analysts estimated that the company's stock has a beta of 0.90.
- The corporate tax rate is 30%.
What is the company's after-tax weighted average cost of capital (WACC) in a classical tax system?
A share pays annual dividends. It just paid a dividend of $2. The growth rate in the dividend is 3% pa. You estimate that the stock's required return is 8% pa. Both the discount rate and growth rate are given as effective annual rates.
Using the dividend discount model, what is the share price?
A company advertises an investment costing $1,000 which they say is underpriced. They say that it has an expected total return of 15% pa, but a required return of only 10% pa. Assume that there are no dividend payments so the entire 15% total return is all capital return.
Assuming that the company's statements are correct, what is the NPV of buying the investment if the 15% return lasts for the next 100 years (t=0 to 100), then reverts to 10% pa after that time? Also, what is the NPV of the investment if the 15% return lasts forever?
In both cases, assume that the required return of 10% remains constant. All returns are given as effective annual rates.
The answer choices below are given in the same order (15% for 100 years, and 15% forever):
Question 547 PE ratio, Multiples valuation, DDM, income and capital returns, no explanation
A firm pays out all of its earnings as dividends. Because of this, the firm has no real growth in earnings, dividends or stock price since there is no re-investment back into the firm to buy new assets and make higher earnings. The dividend discount model is suitable to value this company.
The firm's revenues and costs are expected to increase by inflation in the foreseeable future. The firm has no debt. It operates in the services industry and has few physical assets so there is negligible depreciation expense and negligible net working capital required.
Which of the following statements about this firm's PE ratio is NOT correct? The PE ratio should:
Note: The inverse of x is 1/x.
An investor wants to make a portfolio of two stocks A and B with a target expected portfolio return of 6% pa.
- Stock A has an expected return of 5% pa.
- Stock B has an expected return of 10% pa.
What portfolio weights should the investor have in stocks A and B respectively?
Which of the following statements about futures contracts on shares is NOT correct, assuming that markets are efficient?
When an equity future is first negotiated (at t=0):
A firm wishes to raise $30 million now. The firm's current market value of equity is $60m and the market price per share is $20. They estimate that they'll be able to issue shares in a rights issue at a subscription price of $15. Ignore the time value of money and assume that all shareholders exercise their rights. Which of the following statements is NOT correct?
Question 891 foreign exchange rate, monetary policy, no explanation
Suppose the market expects the Bank of Japan (BoJ) to decrease their short term interest rate by 15 basis points at their next meeting. The current short term interest rate is -0.1% pa and the exchange rate is 100 JPY per USD.
Then unexpectedly, the BoJ announce that they will leave the short term interest rate unchanged.
What do you expect to happen to Japan’s exchange rate on the day when the surprise announcement is made? The Japanese Yen (JPY) is likely to suddenly: