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 $60,000,000 and a yield to maturity of 6% per annum. They are publicly traded and their market price is equal to 90% of their face value.
- The risk-free rate is 5% and the market return is 10%.
- Market analysts estimate that the company's common stock has a beta of 1.2. The corporate tax rate is 30%.
What is the company's after-tax Weighted Average Cost of Capital (WACC)? Assume a classical tax system.
A project has the following cash flows:
Project Cash Flows | |
Time (yrs) | Cash flow ($) |
0 | -400 |
1 | 200 |
2 | 250 |
What is the Profitability Index (PI) of the project? Assume that the cash flows shown in the table are paid all at once at the given point in time. The required return is 10% pa, given as an effective annual rate.
Suppose you had $100 in a savings account and the interest rate was 2% per year.
After 5 years, how much do you think you would have in the account if you left the money to grow?
Question 339 bond pricing, inflation, market efficiency, income and capital returns
Economic statistics released this morning were a surprise: they show a strong chance of consumer price inflation (CPI) reaching 5% pa over the next 2 years.
This is much higher than the previous forecast of 3% pa.
A vanilla fixed-coupon 2-year risk-free government bond was issued at par this morning, just before the economic news was released.
What is the expected change in bond price after the economic news this morning, and in the next 2 years? Assume that:
- Inflation remains at 5% over the next 2 years.
- Investors demand a constant real bond yield.
- The bond price falls by the (after-tax) value of the coupon the night before the ex-coupon date, as in real life.
The price of gold is currently $700 per ounce. The forward price for delivery in 1 year is $800. An arbitrageur can borrow money at 10% per annum given as an effective discrete annual rate. Assume that gold is fairly priced and the cost of storing gold is zero.
What is the best way to conduct an arbitrage in this situation? The best arbitrage strategy requires zero capital, has zero risk and makes money straight away. An arbitrageur should sell 1 forward on gold and:
An equity index stands at 100 points and the one year equity futures price is 107.
The equity index is expected to have a dividend yield of 3% pa. Assume that investors are risk-neutral so their total required return on the shares is the same as the risk free Treasury bond yield which is 10% pa. Both are given as discrete effective annual rates.
Assuming that the equity index is fairly priced, an arbitrageur would recognise that the equity futures are:
Question 784 boot strapping zero coupon yield, forward interest rate, term structure of interest rates
Information about three risk free Government bonds is given in the table below.
Federal Treasury Bond Data | ||||
Maturity | Yield to maturity | Coupon rate | Face value | Price |
(years) | (pa, compounding annually) | (pa, paid annually) | ($) | ($) |
1 | 0% | 2% | 100 | 102 |
2 | 1% | 2% | 100 | 101.9703951 |
3 | 2% | 2% | 100 | 100 |
Based on the above government bonds' yields to maturity, which of the below statements about the spot zero rates and forward zero rates is NOT correct?
Question 809 Markowitz portfolio theory, CAPM, Jensens alpha, CML, systematic and idiosyncratic risk
A graph of assets’ expected returns ##(\mu)## versus standard deviations ##(\sigma)## is given in the graph below. The CML is the capital market line.
Which of the following statements about this graph, Markowitz portfolio theory and the Capital Asset Pricing Model (CAPM) theory is NOT correct?
A Malaysian man wishes to convert 1 million Malaysian Ringgit (MYR) into Indian Rupees (IND). The exchange rate is 4.2 MYR per USD and 71 IND per USD. How much is the MYR 1 million worth in IND?
Question 1000 duration, duration of a perpetuity with growth, needs refinement
An unlevered firm cuts its dividends and re-invests in zero-NPV projects with the same risk as its existing projects. This decreases the dividend yield, but increases the firm's equity's dividend growth rate and duration, while its total required return on equity remains unchanged. The equity can be valued as a perpetuity and the duration of a perpetuity is given below:
###D_\text{Macaulay} = \dfrac{1+r}{r-g}###What will be the effect on the stock's CAPM beta? Assume that there's no change in the risk free rate or market risk premium. The company's equity beta will: