Finance Answers

• Suppose investor I chooses his “market portfolio” to consist of 75% in asset A and 25% in asset B, whereas investor J chooses a different “market portfolio” with 50% in asset A and 50% in asset B. Given these facts, what beta will each investor calculate for asset A?
• Given your answer to part a, which of the following statement is true and why? 

i. Investor I will require a higher rate of return on asset A than will investor J. 

ii. They both require the same return on asset A. 

iii. Investor J will require a higher rate of return on asset A than will investor I.

• Compute the zero-beta portfolios and the equations for the security market line for each investor where the zero-beta portfolio is the minimum variance portfolio which has zero covariance with the index portfolio.

Estimating Cost of Capital (WACC)

• What is the book value of debt and equity?

• What are the weights of debt and equity?

• What is the cost of capital?

• What is the weighted average cost of capital for the firm? (Assume tax rate is 35%)

*It is to be done for Apple Inc for the year 2019 and 2020*

Your firm, People’s Consulting Group, has been asked to consult on a potential pre￾ferred stock offering by Brave New World. This 15% preferred stock issue would be

sold at its par value of $35 per share. Flotation costs would total $3 per share.

Calculate the cost of this preferred stock.

RHA fund invested in 1,000 units of 7 percent, 15-year, RM1,000 bond issued by CMX

Bhd. The bond was issued on 1/11/2018 at par. The firm bought the bonds on 1/11/2021

when the bond was selling at 2% discount. The firm intends to sell back all the bond when

the interest rate is expected to be at 5% on 1/11/2026. Throughout the period of holding

the bond, the firm reinvest all the coupons received in an investment alternative that pays

8 percent interest for the 1st 3 years and 9 percent interest for the remaining years. You

are required to assist RHA fund to determine:

i) their total yield from this bond investment

ii) total capital gain from this investment

imi recently inherited some bonds (face value RM100,000) from her father, and soon thereafter she became engaged to Mamat, a Universiti Teknologi MARA, investment graduate.

Mamat wants Mimi to cash in the bonds, so the two of them can use the money for two years in Monte Carlo. The 2 percent annual coupon bonds mature on January 1, 2041, and it is now January 1, 2021. Interest on these bonds is paid annually and new annual coupon bonds with similar risk and maturity are currently yielding 12 percent.

If Mimi sells her bonds today and puts the proceeds into an account which pays 10 percent compounded annually, what would be the equal annual amounts she could withdraw from the account in the said 2 years’ time (2 equal annuity withdrawal amount)

As an active investor in the Bond market, Johnny purchased a sum of bonds at a yield

of 12 percent p.a. Attached below is the bond purchase agreement between him and

MWAM Bank Berhad:

BOND PURCHASE AGREEMENT

Bond Name:

Green Initiative- MWAM 2010 Bond

Transaction Date: February 05, 2020

Account Reference: MWAMXT19789-01

Account Type: Conventional

Bond Term: 20-year Coupon

Interest: 8.00%

Issuance Date: March 15, 2010

Type of Bond: Straight

Par Value: RM1,000

Maturity Date: March 15, 2030

Coupon Date: Every March 15 and September 15

Consideration: By making PAYMENT, you agree to the Terms and Conditions set out as attached with this Purchase Agreement.

You are required to:

i) Compute the Book value on the transaction date.

ii) Determine the current yield on the date of purchase.

The 12% rate bond of Rs 1,000 face value has a current market value of Rs 1,044.57 and a yield to maturity of 10.8%. Maturity in 5 years. Calculate duration and modified duration

Empire Ltd needs Rs 10,00,000 to build a new factory which will yield EBIT of 1,50,000 per year. The company has to choose between two alternative financing plans. 75% equity and 25% debt and 50% equity and 50% debt. Under the first plan the shares can be sold for Rs 50 per share and the interest rate on the debt will be 14%. Under the second plan shares can be sold for Rs 40 per share and the interest rate on debt will be 16%. Determine the EPS for each plan assuming a tax rate of 35%

En. Iman is the owner of 100 bonds issued by LYC Bhd. These bonds have 8 years remaining to maturity, an annual coupon payment of RM80, and a par value of RM1,000. He purchased the bond 2 years ago when the interest rate was 8.5 percent. Due to the pandemic, the interest rate has fallen by 1.7 percent from it was 2 years ago. Considering this, En Iman decided not to hold the bonds till maturity but to sell it today.

Help him to compute his total capital gain from this investment

The May 17, 2015, price quotation for a Boring call option with a strike price of $50 due to expire in November is $20.80, while the stock price of Boring is $69.80. The premium on one Boring November 50 call contract is ?