Reference no: EM132563897
Problem 1: Strawlim Ltd. paid a dividend of $5.00 per share on its ordinary shares yesterday. Dividends are expected to grow at a constant rate of 10% for the next two years, at which point the dividends will begin to grow at a constant rate indefinitely. If the share is selling for $50 today and the required return is 15%, what is the current dividend yield? What is the growth rate of the expected annual dividend after year two?
Problem 2: Kelvin Ltd currently has 75 million shares outstanding. The shares sell for $6 per share. To raise $100 million for a new plant, the firm is considering a rights offering at $4 per share. Discuss TWO advantages of rights issue. (maximum 200 words) How many new shares are to be sold? How many shares are to be held in order to get one new share? Compute the value of a right and also the value of an ex-rights share.
Problem 3: If the economy recovers next year, analysts expect Stock Y's return for the year to be 20%; if the economy does not recover, analysts expect Stock Y's return for the year to be -5%. If there is a 40% chance that the economy will recover and a 60% that it will not, what is the expected return on Stock Y for next year? Compute the variance and standard deviation of the return on Stock Y for next year.
Problem 4: Sim Leo Ltd currently has 1.2 million ordinary shares outstanding and the share has a beta of 2.2. It also has $10 million face value of bonds that have 5 years remaining to maturity and 8% coupon rate with semi-annual payments, and are priced to yield 13.65%. If Sim Leo issues up to $2.5 million of new bonds, the bonds will be priced at par and have a yield of 13.65%; if it issues bonds beyond $2.5 million, the expected yield on the entire issuance will be 16%. Sim Leo has learned that it can issue new ordinary shares at $10 a share. The current risk-free rate of interest is 3% and the expected market return is 10%. Sim Leo's marginal tax rate is 30%. Compute the market value for both bond and equity. If Sim Leo intends to raise $7.5 million of new capital while maintaining the same debt-to-equity ratio as above, compute its weighted average cost of capital (WACC). Can Sim Leo use the WACC computed for all of its future investment projects? Why?