Finance Answers

a) Hugh has opened a retirement fund account which pays 7 percent interest and requires
$5,000 annual deposits. Hugh will retire in 15 years and expects 10 years of retirement life.
What is the maximum annual retirement benefit Hugh can get during his retirement years?

b) To expand its operation, Sunbeam Ltd. has applied to the Lion Bank for a 3-year, $3,500,000
loan. Prepare a loan amortization table assuming 10 percent rate of interest.

In 2015, it was revealed that Volkswagen (VW) had installed software on its diesel cars in order to circumvent US emissions tests. Carefully, outline what this scandal involved, and explain why the actions of the VW management were unethical. Discuss what issues may have caused this behavior to occur, and what you would do to prevent this from happening in the future. Evaluate the impact of this scandal on the value of VW, and explain why the value of the firm may change by more than the cost of the recall to correct the issue.

1- A number of publicly traded firms pay no dividends yet investors are willing to buy
shares in these firms. How is this possible? Does this violate our basic principle of stock
valuation? Explain your answer.


2- The risk free rate of return is 8 percent; the expected rate of return on the market is 12
percent. Stock X has a beta coefficient of 1.3, an earnings and dividend growth rate of 7
percent, and a current dividend of RM2.40. If the stock is selling for RM35, what should
you do?

Barracuda Inc., has a beta of 1.40, the annual risk free rate of interest is currently 10
percent, and the required return on the market portfolio is 16 percent. The firm
estimates that its future dividends will continue to increase at an annual compound rate
consistent with that experienced over the 2009–2012 period.
Year Dividend(RM)
2009 2.70
2010 2.95
2011 3.25
2012 3.40
(a) Estimate the value of Barracuda Inc., stock.

(b) A lawsuit has been filed against the company by a competitor, and the potential loss
has increased risk, which is reflected in the company’s beta, increasing it to 1.6. What
is the estimated price of the stock following the filing of the lawsuit.

Assuming that all other variables remain unchanged, what impact would each of the
following have on stock price?
(a) The firm’s beta increases.
(b) The firm’s required return decreases.
(c) The dividend expected next year decreases.
(d) The rate of growth in dividends is expected to increase.

a) A corporate bond with RM1000 maturity value carries a 7.5% coupon rate. It currently
makes interest payments semi-annually.
(i) This 12-year bond currently sells for RM961.88. What is the rate of return on this
bond?
(ii) If the bond sold for RM1,030.32, what is the rate of return on this bond?
(8 marks)
b) Briefly explain the cash flows associated with a bond to the investor.
(3 marks)
c) What is the relationship between interest rates and bond prices? When is a bond sold at (i)
a premium, (ii) at a discount, and (iii) at par?

Active Adventures will pay an annual dividend of RM3.15 a share on their common stock
next week. Last year, the company paid a dividend of RM3.00 a share. The company
adheres to a constant rate of growth dividend policy. What will one share of this common
stock be worth ten years from now if the applicable discount rate is 12.5 percent?

The Ship Corp. has paid annual dividends of RM0.48, RM0.60, and RM0.62 a share over the
past three years, respectively. The company now predicts that it will maintain a constant
dividend since its business has leveled off and sales are expected to remain relatively
constant. Given the lack of future growth, at what price will you only buy this stock if you
can earn at least a 14 percent rate of return?

A financial analyst has been following Biostar Inc., a new high-growth company. She
estimates that the current risk-free rate is 6.25 percent, the market risk premium is 5
percent, and that Biostar Inc beta is 1.75. The current earnings per share (EPS0) isRM2.50.
The company has a 40 percent payout ratio. The analyst estimates that the company's
dividend will grow at a rate of 25 percent this year, 20 percent next year, and 15 percent
the following year. After three years the dividend is expected to grow at a constant rate of
7 percent a year. The company is expected to maintain its current payout ratio. The analyst
believes that the stock is fairly priced. What is the current price of the stock?

If the social security retirement were a private retirement system, it would be declared bankrupt. Explain why this is so and why the social security system can continue to pay benefits even though it can be considered bankrupt?