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 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:
Stocks in the United States usually pay quarterly dividends. For example, the retailer Wal-Mart Stores paid a $0.47 dividend every quarter over the 2013 calendar year and plans to pay a $0.48 dividend every quarter over the 2014 calendar year.
Using the dividend discount model and net present value techniques, calculate the stock price of Wal-Mart Stores assuming that:
- The time now is the beginning of January 2014. The next dividend of $0.48 will be received in 3 months (end of March 2014), with another 3 quarterly payments of $0.48 after this (end of June, September and December 2014).
- The quarterly dividend will increase by 2% every year, but each quarterly dividend over the year will be equal. So each quarterly dividend paid in 2015 will be $0.4896 (##=0.48×(1+0.02)^1##), with the first at the end of March 2015 and the last at the end of December 2015. In 2016 each quarterly dividend will be $0.499392 (##=0.48×(1+0.02)^2##), with the first at the end of March 2016 and the last at the end of December 2016, and so on forever.
- The total required return on equity is 6% pa.
- The required return and growth rate are given as effective annual rates.
- All cash flows and rates are nominal. Inflation is 3% pa.
- Dividend payment dates and ex-dividend dates are at the same time.
- Remember that there are 4 quarters in a year and 3 months in a quarter.
What is the current stock price?
Question 381 Merton model of corporate debt, option, real option
In the Merton model of corporate debt, buying a levered company's debt is equivalent to buying risk free government bonds and:
A firm has 2m shares and a market capitalisation of equity of $30m. The firm just announced earnings of $5m and paid an annual dividend of $0.75 per share.
What is the firm's (backward looking) price/earnings (PE) ratio?
Question 639 option, option payoff at maturity, no explanation
Which of the below formulas gives the payoff ##(f)## at maturity ##(T)## from being short a put option? Let the underlying asset price at maturity be ##S_T## and the exercise price be ##X_T##.
Question 668 buy and hold, market efficiency, idiom
A quote from the famous investor Warren Buffet: "Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell."
Buffet is referring to the buy-and-hold strategy which is to buy and never sell shares. Which of the following is a disadvantage of a buy-and-hold strategy? Assume that share markets are semi-strong form efficient. Which of the following is NOT an advantage of the strict buy-and-hold strategy? A disadvantage of the buy-and-hold strategy is that it reduces:
A firm wishes to raise $50 million now. They will issue 5% pa semi-annual coupon bonds that will mature in 3 years and have a face value of $100 each. Bond yields are 6% pa, given as an APR compounding every 6 months, and the yield curve is flat.
How many bonds should the firm issue?
Question 941 negative gearing, leverage, capital structure, interest tax shield, real estate
Last year, two friends Lev and Nolev each bought similar investment properties for $1 million. Both earned net rents of $30,000 pa over the past year. They funded their purchases in different ways:
- Lev used $200,000 of his own money and borrowed $800,000 from the bank in the form of an interest-only loan with an interest rate of 5% pa.
- Nolev used $1,000,000 of his own money, he has no mortgage loan on his property.
Both Lev and Nolev also work in high-paying jobs and are subject personal marginal tax rates of 45%.
Which of the below statements about the past year is NOT correct?
Question 973 foreign exchange rate, monetary policy, no explanation
Suppose the market expects the Reserve Bank of Australia (RBA) to increase the policy rate by 25 basis points at their next meeting. The current exchange rate is 0.8 USD per AUD.
Then unexpectedly, the RBA announce that they will leave the policy rate unchanged due to increasing unemployment and fears of a potential recession.
What do you expect to happen to Australia's exchange rate on the day when the surprise announcement is made? The Australian dollar is likely to: