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3. Explain the capital structure theory? How we can calculate cost of debt and cost of equity?
a. If cost of debt is9% and cot of equity is 13% and firm was financed in proportion of 40% debt and
60% equity than calculate cost of capital?
b. If rate on T bills is 9 % and beta is 0.5, rate of return in market is 15% than calculate cost of equity
by using Capital Asset Pricing Model (CAPM).
6. The current ex div ordinary share price is $4.50 per share. An ordinary dividend of 35 cents per share
has just been paid and dividends are expected to increase by 4% per year for the foreseeable future.
The current ex div preference share Price is 76.2 cents. The loan notes are secured on the existing
non-current assets of Droxfol Co and are redeemable at par in (8) eight years’ time. They have a
current ex interest market price of $105 per $100 loan note. Droxfol Co pays tax on profits at an
annual rate of 30%.
Ordinary shares, par value $1 5,000
10% loan notes $ 5,000
9% preference shares, par value $1 2,500
Required
Calculate the current weighted average cost of capital of Droxfol Co?
7. Investors want to be able to get their money back at short notice whereas companies want borrowing
for long term. How this mismatch in liquidity requirement is managed in practice explain.
8. What is the two part decision rule that arises out of the Hirshliefer separation theorem?
9. What are the four main assumptions of the single period investment consumption model?
10. Why should allocated fixed costs be excluded from project cash flows in an NPV analysis?
12. Define stock purchases .Write down advantages and disadvantages of purchases
15. Define and explain dividend irrelevance and capital structure irrelevance. Explain the link between the
two.
16.
a. US inflation is expected 5% next year and UK 3%. If the current dollar/ pound spot rate is 1.4555,
forecast the spot rate in 12 months’ time.
17. $/£ 5 month forward 1.7460, 6 month forward 1.7650. A company wishes to hedge via a five to six
month time option forward dollar sale contract. What will be the contract’s exchange rate?
18. What advantages do over the counter options have over traded currency options?
19. What are country risk and economy risk and how they can be managed?