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The required rate of return on the shares in the companies identified below is 10% pa. Calculate the current share price (ex-dividend) in each case.
(a) The current earnings per share of Alpha Ltd are $10.00. Earnings are expected to remain constant forever. For the next 3 years, Alpha anticipates having to put half of its earnings back into the business to maintain the level of earnings. After this it is expected that all earnings will be able to be paid out as dividends.
(b) Gamma Ltd is planning to reinvest earnings and not pay dividends until year 3, when a dividend of $10 is expected (D3 = $10). Dividends are expected to grow at 2% pa forever after that.
What is the formula value of each warrant under these conditions?- What happens to the rate of return from the warrant as the stock price rises? Why do you think this happens?
Can you devise a different strategy to test the explanatory power of size in the presence of the market factor?
Fingen's 17?-year, ?$1,000 par value bonds pay 14 percent interest annually. The market price of the bonds is ?$1,100 and the? market's required yield
You write one IBM call contract for a premium of $4 and an exercise price of $120. You hold the option until the expiration date, when IBM stock sells for $121 per share. You will realize a ______ on the investment.
Interpret the following comment made by Wall Street analysts and portfolio managers:
Systemic Risk : - Why was the Federal Reserve concerned about systemic risk due to the financial problems of Bear Stearns?
A company current investment opportunity schedule and the weighted marginal cost of capital schedule are shown below:
Show how you can realize a guaranteed profit from covered interest arbitrage. Assume that you are a euro-based investor. Also determine the size of the arbitrage profit.
What is the price of a 6-month prepaid forward contract, which expires immediately after the second dividend? Explain how you derived your answer.
Suppose that Treasury bills are currently paying 1 percent and the expected inflation is 3 percent. What is the real interest rate?
What is the future value, ten years from now, of ten $1,000 cash flows using a periodic interest rate of 8% compounded annually? The cash flows are made at the end of each year.
Bank prime loan charges 3.75% currently. Find yield for 12-month Treasury bills from the Bloomberg website and indicate the size of current default risk premiums for bank prime loans.
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