Finance Answers

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?

Scott is an accountant who purchased a vacant block of land in

Brisbane on 1 October 1980. On 1 September 1986, Scott built a

house on the land. At the time, the land was valued at $90,000 and

the cost of construction was $60,000. The property has been rented

out since construction was completed. On 1 March of the current tax

year, Scott sold the property at auction for $800,000.

Requirement:

a) Based on the information above, determine Scott’s net

capital gain or net capital loss for the year ended

30 June of the current tax year.

b) How would your answer to (a) differ if Scott sold the

property to his daughter for $200,000?

c) How would your answer to (a) differ if the owner of the

property was a company instead of an individual?

Hilary is a well-known mountain climber. The Daily Terror

newspaper offers her $10,000 for her life story, if she will write it.

Without the assistance of a ghost writer, she writes a story and

assigns all her right, title and interest in the copyright for $10,000

to the Daily Terror. The story is published and she is paid. She has

never written a story before. She also sells the manuscript to the

Mitchell Library for $5,000 and several photographs that she took

while mountain climbing for which she receives $2,000.

Requirement:

Discuss whether or not the three payments are income from

personal exertion. Would your answer differ if she wrote the

story for her own satisfaction and only decided to sell it later?

Your client is a parent who lent $40,000 to her son to provide a
short-term housing loan. The agreement is that the son will repay
$50,000 at the end of five years.
Reconsider this question in light of the following facts. The loan was
made to the son without any formal agreement and without any
security provided for the sum lent. In addition, the client (the
mother) has informed you that she told her son that he need not
pay interest. However, the son repaid the full amount after two
years and included in his payment an additional amount which was
equal to 5% pa on the amount borrowed. Only one cheque was
presented for the total amount.
Requirement:
Discuss the effect on the assessable income of the parent

Stock W has the following returns for various states of the economy:
State of the Economy Probability Stock W's Return
Recession 10% -30%
Below Average 20% -2%
Average 40% 10%
Above Average 20% 18%
Boom 10% 40%
Stock W's standard deviation of returns is
A) 10%.
B) 14%.
C) 17%.
D) 20%