fil attachedQuestion 1 (10 marks) a. Middleton expects to buy a 9.5% coupon, 15 years bond today,...

Question

fil attachedQuestion 1 (10 marks)  a. Middleton expects to buy a 9.5% coupon, 15 years bond today, when it is first issued by Alex PLC. If interest rates suddenly rise to 12.5%, what happens to the value of Middleton’s bond? Why? (Word limit 20 - 30 words) (3 Marks)  b. A corporate bond has a face value of $1 000, a coupon rate of interest of 10.5% per annum, payable semi-annually, and 20 years remaining to maturity. The market interest rate for bonds of similar risk and maturity is currently 8.5% per annum.  Required:  i. What is the coupon payment of the bond? (1 mark)  ii. What is the present value of the bond? (3 marks)  iii. If the coupon payment is payable annual (based on the same information), what is the value of the bond? (3 marks)   Question 2 (10 marks) a. Briefly discuss the relationship between the following: (Word limit 50-70 words)  i. Share price and investors required rate of return  ii. Share price and divided growth rate      (3 Marks)  b. Otama LTD has an issue of preference shares outstanding that pays a $2.85 divided every year. If this issue currently sells for $77.32 per share, what is the required return? (3 Marks)  c. Price Tigers LTD expects to pay a $3.25 per share dividend next year. The company pledges to increase its dividend by 5.1% per year, indefinitely. If you require a return of 11% on your investment, how much will you pay for the company’s share?  (4 Marks)  Question 3 (10 marks  a. Calculate both the arithmetic and the geometric average return of the following investment;  Year 1,2,3,4   Return 10.5%, 12.2%, -5.5%, 2.8% respectively. (4 marks)  b. Teena is considering investing in Stock A and stock B. She plans to invest $ 25,000 in the low risk stock and $ 50,000 in the high-risk stock. You have been given the following information about these two stocks in the table below:  Stock    A         B  E(R)     15%      10  ?         25%       22%  Correlation between A and B 0.20  Based on the given information above, you are required to:  i. Calculate the portfolio weights  ii. Calculate the portfolio return.  iii. Calculate the portfolio risk.  iv. Compare portfolio risk with the individual stock risks and identify the benefit of the diversification of the portfolio. (6 marks) Question 4 (10 marks)  XYZ Corporation has 45,000 ordinary shares outstanding which are currently selling for 110 per share. The number of preference share outstanding is 30,000 and the book value of a share is $100 while the market value is $105. Company has issued 2500 bonds with face value of 1000. The Market value of bond is higher than the face value and it is $1,100.  The required rate of return of ordinary shareholders, preference shareholders and bond holders are 10%, 12% and 15% respectively. The Company is subject to 30% corporate tax.  Based on the information given;  i. Calculate the market value of the firm (4 marks)  ii. Calculate the capital structure weights (2 marks)  iii. calculate the Weighted Average Cost of Capital (WACC) of the company (4 marks)  Question 5 (10 marks)  a. Venture Capital is an alternative for financing new and often high-risk ventures. Briefly discuss minimum of 3 key considerations of choosing a venture capitalist. (Word limit 70 - 100 words) (3 marks)  b. Explain the cost of having too much cash balance or too little cash balance in a business. (Word limit 30-50 words) (2 marks)  c. Matilda Company financial statement information has given in the following table.  Item                                       Beginning         Ending Inventory                             1783                    1965 Accounts payable               2560                    2820 Accounts receivable           4920                   4200 Revenue                                        12500 Cost of sales                                 9500  Required: Based on the financial statement information above, calculate the operating and cash cycle. (5 marks)

Soumyadeep · Accepted Answer

ASSIGNMENT
Name
ID
Lecturer Name
Course ID and Title
Date
Location
Table of Contents
Question 1	2
Question 2	3
Question 3	5
Question 4	6
Question 5	7
References	8
Question 1
a. The current coupon rate is 9.5% and the tenure is 15 years. If the interest rate rises to 12.5% suddenly, the value of the bond will decrease. The future coupon payments and the principal will be discounted at a higher discount rate which means that the present value of the future cash flows will be less. So the value of the bond will be lower.  
b. 
i. 
	Face Value
	1000
	Coupon Rate
	10.50%
	Frequency
	2
	 
	 
	Coupon Payment
	52.5
Coupon payment is $52.50
ii. Current price of bond=   [
Where 
F= Face / Par value of bond= $1,000
C=Coupon Payment= $1,000 X 10.5% X 0.5= $52.50
r = Yield to maturity (YTM)= 8.5%/2=4.25%20X2
n = No. of periods till maturity= 20X2=40
Substituting the above values in eqn (i), we get
Current price of bond = 
                            = $1001.56 + 189.22
                            =$1,190.77
iii. If coupon is paid annually
Current price of bond=   [
Where 
F= Face / Par value of bond= $1,000
C=Coupon Payment= $1,000 X 10.5% = $105
r = Yield to maturity (YTM)= 8.5%
n = No. of periods till maturity= 20
Substituting the above values in eqn (i), we get
Current price of bond = 
                            = $993.65 + $195.62
             =$1,189.27
Question 2
a. 
i. The price of a stock is given by
g= dividend growth rate
r= investor required rate of return
Now when r increases, the denominator increases and hence the price of stock P decreased. It also means that with increasing required rate of return, the stock is perceived to be riskier.
ii. If dividend growth rate increases, the denominator decreases and hence the price of stock increases
iii. The price of a stock is given by
Where 
P= Current price per share = $77.32
Rearranging we get= =3.69%
iv. The price of a stock is given by
So 
g= dividend growth rate=5.1%
r= investor required rate of return=11%
Question 3
a. Arithmetic Average Return= Sum of annual returns/number of returns
Geometric Average Return= 
Where 
         =4
	Year
	Return
	1
	10.50%
	2
	12.20%
	3
	-5.50%
	4
	2.80%
	Number of years
	4
	Arithmetic Average Return
	5.00%
	Geometric Average Return
	4.76%
b. 
i. Weight of individual stock = Amount investment in individual stock/Total Investment
	Stock
	Amount Invested
	A
	25,000
	B
	50,000
	Total
	75,000
	Weight of Stock A
	33.3%
	Weight of Stock B
	66.7%
ii.  Portfolio Return = Weight of Stock A x Expected Return of Stock A + Weight of Stock B x Expected Return of Stock B
	Stock
	E(R) 
	Weights
	A
	15%
	33%
	B
	10%
	67%
	 
	 
	 
	Portfolio Return
	 
	11.67%
iii. Portfolio Risk
 
Where wA,

Sun	Mon	Tue	Wed	Thu	Fri	Sat
30	31	1	2	3	4	5
6	7	8	9	10	11	12
13	14	15	16	17	18	19
20	21	22	23	24	25	26
27	28	29	30	1	2	3

Question 1 (10 marks) a. Middleton expects to buy a 9.5% coupon, 15 years bond today, when it is first issued by Alex PLC. If interest rates suddenly rise to 12.5%, what happens to the value of...

Answer To: Question 1 (10 marks) a. Middleton expects to buy a 9.5% coupon, 15 years bond today, when it is...

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