What would be the expected price of a stock when dividends are expected to grow at a 25% rate for three years, then grow at a constant rate of 5%, if the stock’s required return is 13% and next year’s dividend will be $4.00?
What rate of return is expected from a stock that sells for $30 per share, pays $1.50 annually in dividends, and is expected to sell for $33 per share in one year?
The ordinary shares of FED Limited are selling for $26.75 on the open market. A dividend of $3.68 is expected to be distributed, and the growth rate of this company is estimated to be 5.5%. If Bob Dean, an average investor, is considering purchasing this share at the market price, what is his expected rate of return?
Healthy Foods Company (HFC) currently processes seafood with a unit it purchased several years ago. The unit, which originally cost $500,000, has a current book value of $250,000. HFC is considering replacing the existing unit with a newer, more efficient one. The new unit will cost $750,000 and will also require an initial increase in net working capital of $40,000. The new unit will be depreciated on a straight‐line basis over five years to a zero balance. The existing unit is being depreciated at a rate of $50,000 per year. HFC expects to sell the existing machine today for $275,000. HFC’s tax rate is 30%. If HFC purchases the new unit, annual revenues are expected to increase by $100,000 (due to…
The table below gives the amount invested and betas for three stocks.
Stock Amount Invested Beta
GM K10, 000 1.2
IBM K10, 000 1.0
WMT K20, 000 0.7
REQUIRED:
New Horizon Ltd is an Australian company. The Australian dollar is its functional currency. On 1 October 2018, New Horizon Ltd entered into a binding agreement with a German company to construct a plant for New Horizon. The cost of the plant was U.S. $2 750 000. The plant was completed on 17 October 2019 and shipped FOB Hamburg on that date. New Horizon made the full payment for the plant on 31 October 2019. Each year New Horizon’s financial year ends on 31 December. Assume the following were the exchange rates on different dates: 1 October 2018: Aus $1 = U.S. $0.6975 31 December 2018: Aus $1 = U.S. $0.7105 1 October 2019: Aus $1 = U.S. $0.6825 17 October…
The following data available for ABC company.
| Account | Beginning balance | Ending Balance | Use/source of cash |
| Accounts payable | 20,300 | 24,400 | |
| Inventory | 60,600 | 67,200 | |
| Long term debts | 127,500 | 125,800 | |
| Common stock | 200,400 | 215,900 |
Required:
Big Water Ltd currently has the following capital structure:
Debt: $4,500,000 paying 9.5% coupon bonds outstanding with 12 years to maturity, an annual before-tax yield to maturity of 8% on a new issue. The bonds currently sell for $1,113 per $1,000 face value.
Ordinary Shares: 65,000 shares outstanding currently selling for $75 per share. The company just paid a $6.50 dividend per share and is experiencing a 6% growth rate in dividends, which it expects to continue indefinitely.
(Note – The firm’s marginal tax rate is 30%.)
Required:
Alice has an investment portfolio that paid the rate of return of 23%, 12%, – 34%, 18% and 10% over the last five (5) years. Required: a. Calculate the arithmetic average return and the geometric average return of this portfolio? b. If the following information is available for Alice’s portfolio in the forecast for next year, calculate the expected return and identify the risk of return by computing the variance and the standard deviation. State of economy Probability of the economic state Rate of Return Boom 0.55 25% Normal 0.30 17% Recession 0.15 -8% c. If the beta of this portfolio is 1.2, the risk-free rate of return is 7%, how much is the risk premium applied in calculating the…
APM Fund Management is considering the following options for their new investment portfolio: Option 1 – A non-callable corporate bond that pays coupon rate of 9% annually. The bond will be mature in 20 years. The year-to-maturity (YTM) of the bond is 7.5% and the face value of the bond is $1 000. Option 2 – An ordinary share which just paid a dividend of $7.50 with a constant dividend growth rate of 5% each year. The current market price of this share is $112.50. Option 3 – A $100 par value preference share which pays a fixed dividend of 13%. The required rate of return of the preference shares in the same group is 12%. Required: How much should…
CASE STUDY – BASIL LIMITED and LINDA LIMITED – CONSOLIDATION AND GOODWILL ANALYSIS On 1 July 2019, BASIL Ltd acquired all the issued shares (ex-div.) of LINDA Ltd for $272 000. At this date the financial statements of Lucky Ltd showed the following balance in its accounts: Share Capital $150 000 General Reserve 40 000 Retained Earnings 80 000 Dividend Payable 20 000 Goodwill 10 000 At 1 July 2019, all identifiable assets and liabilities of Linda Ltd were recorded at amounts equal to the fair value. The financial statements of Basil Ltd and Linda Ltd at 30 June 2020 contained the following information: Basil Ltd $ Linda Ltd $ Profit for the period…
Sally has $50 000. She wants to save $120 000 to deposit for her first home loan. She decided to put that $50 000 in an investment fund that pays an interest rate of 11% per annum (per year), compounding annually. Required: a. How long does she need to wait until she has saved $120 000? b. If Sally wishes to have that $120 000 in five years, how much does she need to put into the investment now with the same interest rate of 11%? c. Assume that Sally was offered an alternative investment, which requires an initial investment of $60,000 for 7 years. Calculate the amount of money Sally would accumulate after 7 years by this investment, if…
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