Perso NEw RAH ILLUSTRATIVE EXAMINATION Attempt 10 questions Question 1 ‘We expecta share to pay a dividend of 50 cents in one year’s time. ‘The discount rate (Ri) is 8% p.a. and the dividend is expected to grow by 2%4p.a. (a) What are the share prices for the next 4 years? (b) What are the dividend yield and capital gain in period 2? Comment. (© HowisRedeterminea? = Re 4 = 0.06 Duriterde Shove bein mia 2 oe hae 8.33 divided yell» 0.5! = 0.06 0.0 9.50 fae os! g.61 Leh as 0.5208 5.84 & —Fso 0.5306 q.02 = 000-4 O,5HI2d This wil he te core jprQuestion 2 ‘A.company has a profit of $10 per share and it pays a dividend of $6. (a) What is the payout ratio? (6) Whatis the retention ratio? Assume the share price is $200. (c) Whatis the: © earnings yield * PEsatio © dividend yield (a) Pagout wall = Ho > 60% (b) rebatlm rales = plio* 40% ) Oeomacge yeollt= 10. = <% PE yaks = oP = 20 Wee yatta =3% vQuestion 3 We heve made the following estimates of the future values of the free eash flow to equity of GC Co. Ltd. Sm 1 20 e 2 24 3 29 4 35, Thereafter, the free cash flow is expected to grow at 2.5% p.a. The required return on equity is 8% pa. {a) What is the value of GC Co. Lid? (b) There are 2M shares on issue. What is the appropriate share price? {c) Consider the effect of assuming different growth rates for free cash flow after year 4. (@) Tvs as(.oas) = 652.27 0.0SS = 0 4.4 pM 4 GEL2 Vale of 60 roe te 7.08 ee = 19.52 410.58 F25.02450S, 1b = FETE (b) Mare pres ofS, 64 @) Ty g =a TVs 35: (ipa) = 59s 630 Then. he of cat 18. sa +020. SE tl3 0247, rapt = 52S 20 Pept yan thle ofQuestions Chews cuwrhengo) We havea choice of borrowing at 5% p.a. or at 4.8% p.a. compounding daily. Which alternative is preferable? 365 6 36> fips Ct + S48) -1 56, ovoz151) -1= 0.0492 4, 4,926 "ans, He flint linac prefered Question (laew Leordenga) We buy a six year bond with face value $100,000 and semi-annual coupon $3,000 at a yield of 6.4% pa. After two years we sel it at a yield of 6.9% p.a, What is the holding Puce = $96 032.76 Yss 2 genre, n=8> j Pree G6 900.25 Holding pencecl pub 276 per dalfyor = SsTpa.Question 6 (Shee eworteyp) We take out a 15 year mortgage for $500,000 a 8% p.a. Payments are monthly. (a) Whatis the payment? (b) How much do we owe after 3 years? (2) Regmente= $4778, 26 (6) nz thy PV= $444 429.07 Question 7 (1) Dan yell fall ~_ @) Rize eusmenga 22d cneneete fervleran tals — Comings tual Cle Culenent re U4) Lavesthro bervocer Heavily (s) Tawezto Cyetoral acl taro Cuiaoge.Question 8 (@) The equity of company XZ. has a beta of 0.9, the risk-free rate is 4% p.a, and the market return is 10% p.a. Also, the company’s dividend yield is 4% p.a. and the projected growth rate of dividends is 5% p.a. What is the cost of equity for XZ? (b) XZ has a debt/assct ratio of 40%, the cost of debt is 7% p.2. and the corporate tax rate is 30%, What is XZ’s WACC? (c) Under what assumptions will the WACC calculated in (b) be the unique value of WACC for XZ? (a) fon & e i, 94 hts eGo () see (putts pynlbns. oof ermporet wécc= a 0.4 (0.7) 72 28bF 1 Gb= E82 e) Tes ell bagporn oud, 1f We. acsurapllse of He Wedges “pees bea (One EGF oper. . ‘ Lreestoo Line jetinal 7 The neh A “LO zj Es ‘There. Ane Ne perfecto to Ylo. parkerQuestion 9 Shares in ABC are trading at $8.80. The company’s last dividend was 15 cents per share. If the required retum is 8.0% p.a., what value of g are investors using? Does this g.90> 0.15('+4) 20,704 F.8g = ONS TO 15Y Ooh 9 5.54 = 0.554 =0,062 Let do emperucbhle, for a frm to prow at deck a. hgh vote forever Question 10 make sense? XYZ had earnings per shares of 57 cents, paid a dividend of 30 cents per share, and had a ROE of 15%, What is the expected future growth rate of dividends? Docs the answer g= (1- pegoust ral) x ROE make sense?Question 11 Sapiegad od fave reemteyfasbol Bs rabilade Hea ‘ali 10 # hae fen y Jeliime Mas boeger Md “he be Leds Giada fre 3) hae ecpgfrent lp Wr in (presi pow hice Question 12 When is a market semi-strong form efficient? The Sydney Morning Herald's stockpicking competition is often won by a schoolchild? Does this show that the sharemarket is semi-strong fort efficient? Lien o a pur tro Dewe~ -sheug contd fre tele aM peel We WY ol th deformed No. 7 win AY a behocl bl. ielf win je locpotilin De pet he “Yea to 100 Via Care,Question 13 How does the imputation system of corporate taxation work? Question 14 A car manufecturing company wants to introduce a new model. It will cost $100m to set-up ond it will pay a net profit of $20m over the next 2 years and $30m over the following 4 years. ‘The introduction of the new model will reduce the profits on the existing model by the following amounts: 1 $15 $10 $5 $5 WACC is 10% pa. Should the company introduce the new model? Zz The reobaclon:c& pref re Re oregeial nacht shoctl ho sehclente Via Coat, O -ser 4<7 ; 7 , 5 NPV=~ pe! (welled dsdurloce WN 3,30 , 2 $10 Ine= FBS. 48 TAR= I. 06) 3 as eas S 30 & 30 °Question 15 ‘We have a project with the following cash flow? 0 1,000,000 1 300,000 2 500,000 3 500,000 4 300,000 [Al] cash flows are spread evenly over the year. WACC is 8% pa. (a) What is the payback period and discounted payback period’? (b) What are the weaknesses of the payback criterion? (@) Grubtucths ' Ms Ouraskadine IMS t Bev ove = -217777,78 QI 78 2 FopowO — yaw bbq. Job 47 IF 3 isco — aabqybiia 11033 63:3! A showovo aneso® 4G | 323879.27 PB Porert = 2+ Pvocew = 2.4 yeaxo Sud oO Deseorntll PB parcodl = ar Bree OM GM (6) [i) The PB Credserm Talhe ne O.ceoat io dhe - vee of (thes pelt 4 Doryvec ten Y LILeg Acorn ki Pi pore), . (i) Te favour Shnt- dorm progte® Oey login preg 10Question 16 Why do companies pay dividends? Tle ner. chvreluols 10 A sypal which pe ge? hw crevad Qre vole OY Me nar ¢ aap ddd mid tere OE gine a peuecire repels (oak fgets, rellncen prof ® Cush dvetlinds h Tavezerr epbowiais