Finance Answers

Assume the framework of the simple asset market model of the nominal exchange rate (NER) where the equilibrium condition is ensured by limitless arbitrage. You are given the following data for the Home (H) and Foreign (F) interest rates, announced to hold at a horizon of one year, respectively it = 5% and it* = 3%.
a) If you also consider that the corresponding forward rate of the Home currency (HC) with respect to the Foreign currency (FC) is Ft = 1 (using the price or academic quotation, as in the textbook), calculate the equilibrium spot exchange rate St of the HC consistent with Covered Interest Parity (CIP). Explain by how much (in % terms) the HC is expected to depreciate or appreciate.

Sheen Ltd manufactures garden tools and has decided to expand operations. The new
operations are expected to increase EBIT from the current level of $500 000 to $1 million p.a.
Sheen has a capital structure that utilizes bonds, ordinary equity and preference shares. The
$500 000 of issued bonds pay 6% p.a.. Preference shares pay an annual fixed dividend of $70
000. The company has 1 000 000 ordinary shares that are trading at $5.1 per share. The
Australian corporate tax rate is 30%. Most of the shareholders of Sheen live outside Australia
and cannot fully utilise dividend imputation credits.

Sheen needs to raise $700 000 to fund the expansion. Assuming the company can issue new
shares at the current market price, what is the impact on EPS new shares are issued to fund the center? If new debt can be raised at a 9% interest rate, what is the impact on EPS of using debt rather than a new equity issue?

Task is to download CCA’s 2017 Annual Report and answer the following questions. Annual Report as in here https://www.ccamatil.com/-/media/Cca/Corporate/Files/Annual-Reports/2018/Annual-Report-2017.ashx

1. What is the average annual dividend growth rate between 2013 and 2017? Hint-use information provided on page 135.

2. Do you think the company will maintain this recent growth rate forever? Justify your answer and if you disagree then also suggest a new dividend growth rate range. Hint-start by reading pages 8-9.

3. Suppose the annual dividend growth rate is 5 percent, which will continue into the foreseeable future. What is the intrinsic value of its share at 31st December 2018, if you require an annual return of 10 percent?

4. What was the share price on 31st December 2018?

5. Should I invest in the company’s shares based on 3 and 4 above? Why or why not?

Suppose a worker with an annual discount rate of 0.05 percent currently resides in New South Wales and is deciding whether to remain there or to move to Victoria. There are three work periods left in the life cycle. If the worker remains in New South Wales, he will earn $20,000 per year in each of the three periods. If the worker moves to Victoria, he will earn $30,000 in each of the three periods. The cost of moving is $1000 and it would cost the worker $500 more per year to live in Victoria. If the worker decides to move she will be separated from her friends and family. The psychic costs of the workers move is estimated at $10 000. Will the worker make the move? Why or Why not?

Consider the following information:

Bear Market Normal Market Bull Market
Probability 0.3 0.5 0.2
Return on Stock A -10% 0% 40%
Return on Stock B -5% 5% 50%

a) Calculate and comment upon the expected return and standard deviation of A and B.

b) Assuming that you have £20,000 to invest. You have decided to invest £10,000 in stock A and the remainder in stock B. Calculate and comment upon the expected return and standard deviation of your portfolio if the correlation between A and B is 0.5.

c) Does a fully diversified portfolio include any risk? Use and explain appropriate diagrams in your answer.

Investors require a minimum rate of return of 10% on all capital invest- ments, and both equipment and structures depreciate at a rate of 15% per year. Firms are 100% equity financed. In what follows, assume that the opportunity cost of equity finance is not deductible for tax purposes.
In the initial setting, the corporate tax rate is 50% and investment in equipment can be expensed (written off immediately) for tax pur- poses, while investments in structures are written off on a declining balance basis with tax depreciation allowances equal to true economic depreciation.

Determine the equilibrium values of the pre-tax marginal prod- ucts of equipment and structures in this setting. What are the marginal effective tax rates on equipment and structures respec- tively?

A bridge will cost (in the present) $280 million to build, will be completed by next year, and will start producing the benefits next year, $8 million per year. It will cost $1 million a year to maintain (starting next year, too). It is expected that the bridge will last for a long time. The market interest rate is 5%. Approximate (with the formula for perpetuity) the present value of the bridge project (including the cost of construction, benefits, and the cost of maintenance).

You are at the midpoint of a project and have used only 30% of your budget. Does this mean that you will be under budget at the end of the project? Explain your answer.

Individual retirement accounts (IRA) allow some taxpayers to set aside kshs.160000 a year for retirement, and the interest earned on these accounts is exempt from taxation. If an individual starts selling aside money in an IRA early in her working life, its value at retirement can be substantially higher than the amount actually put in. Wanjiku sets aside kshs.160, 000 a year and starting when she is 25 years for an expected retirement age of 65, and expects to make 8% p.a return on investments. Calculate the total expected value when she retires. What if the income is taxed at 40% per year

You have a relative who has accumulated savings of kshs.250, 000 over his working lifetime and now plans to retire. Assuming that he wishes to withdraw equal installments from these savings for the next 25 years of his life, how much will each installment amount to if he is earning 5% on his savings