Question 1

You are an active investor in the securities market and you have established an investment portfolio of two stock A and B five years ago.

Required:

  1. If your portfolio has provided you with returns of 9.7%, -6.2%, 12.1%, 11.5% and 13.3% over the past five years, respectively. Calculate the geometric average return of the portfolio for this period?
  2. Assume that expected return of the stock A in your portfolio is 14.6%. The risk premium on the stocks of the same industry are 5.8%, the risk-free rate of return is 5.9% and the inflation rate was 2.7. Calculate beta of this stock using Capital Asset Pricing Model (CAPM)?
  3. Assume that you bought 200 stock B in your portfolio for total investment of $1200, now the market price of the stock is $75, the dividend paid for this stock is $2 each year. How much is the capital gain of this stock?
  4. Assume that the following data available for the portfolio, calculate the expected return, variance and standard deviation of the portfolio given stock A accounts for 45% and stock B accounts for 55% of your portfolio?
  A B
Expected return 12.5% 18.5%
Standard Deviation of return 15% 20%
Correlation of coefficient (p) 0.4  

 

Question 2

Blooming Ltd. currently has the following capital structure:

Debt:  $2,500,000 par value of outstanding bond that pays annually 12% coupon rate with an annual before-tax yield to maturity of 10%. The bond issue has face value of $1,000 and will mature in 25 years.

Ordinary shares: 65,000 outstanding ordinary shares. The firm plans to pay a $7.50 dividend per share in the next financial year. The firm is maintaining 3% annual growth rate in dividend, which is expected to continue indefinitely.

Preferred shares: 40 000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 14%.

 

Company tax rate is 30%.

Required: Complete the following tasks: 

  1. Calculate the current price of the corporate bond?
  2. Calculate the current price of the ordinary share if the average return of the shares in the same industry is 9%?
  3. Calculate the current value of the preferred share if the average return of the shares in the same industry is 12%
  4. Calculate the current market value (rounded off to the nearest whole number) and capital structure of the firm (rounded off to two decimal places). Identify the total weights of equity funding
  5. Compute the weighted average cost of capital (WACC) under the traditional tax system for the firm, using dividend constant growth model for calculation the cost of ordinary equity

 

Question 3

Bunnings Ltd is considering to invest in one of the two following projects to buy a new equipment. Each equipment will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 8%. The cash flows of the projects are provided below.

  Equipment 1 Equipment 2
Cost $186,000 $195,000
Future Cash Flows

Year 1

Year 2

Year 3

Year 4

Year 5

  

86 000

93 000

83 000

75 000

55 000

  

97 000

84 000

86 000

75 000

63 000

 

Required:

  1. Identify which option of equipment should the company accept based on Profitability Index?
  2. Identify which option of equipment should the company accept based on discounted pay back method if the payback criterion is maximum 2 years?

 

Question 4

Net profit of Lily Fashion House Ltd in the current year is $2,575, 000. The company is planning to launch a project that will requires an investment of $745 000 next year. Today the company’s stock has market value of $22/share. Lily Fashion House has the current capital structure of 60% in equity and 40% in debt. Required:

  1. The company is paying a cash dividend of $4.50/share plus an extra-cash dividend of $1.5/share. Tomorrow the stock will go ex-dividend. Explain why there is ex-dividend date and ex-dividend price? Calculate the ex-dividend price tomorrow morning. Assuming the tax on dividend is 25%?
  2. How much dividend Lily Fashion House can pay its shareholders this year and what is dividend payout ratio of the company. Assume the Residual Dividend Payout Policy applies?
  3. Floral Textile Ltd. is a daughter company of the Lily Fashion House Group and currently under a liquidation plan due to severe business contraction caused by the COVID 19 pandemic. The company plans to pay total dividend of $3.5 million now and $ 8.5 million one year from now as a liquidating dividend. The required rate of return for shareholders is 13.5%. Calculate the current value of the firm’s equity in total and per share if the firm has 2.5 million shares outstanding?
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