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Which tax is not shifted to others ?
Consider a two-period economy here investors are endowed with income in both periods are face the same investment opportunities with certain outcomes.
Investors derive utility from consumption in both periods and the utility function is assumed to be increasing and concave.
Explain how the introduction of a perfect capital market influences investors consumption and production decisions.
A small business promise a return of $28 000 on an initial investment of $20 000 after 5 years.
What is the internal rate of return (IRR)
Assuming that paper is sold in a competitive market, graph the PMB and the PMC curves
QUESTION TWO. (30 Marks)
The supply of paper is described by the following equation:
Qs = 5,000P (PMC)
where Qs is tons supplied per year and P is the price per ton. The demand equation is
described by:
QD = 400,000 - 1 000P (PMB = SMB)
where QD is tons demanded per year.
Because of the pollution associated with paper production, marginal external costs of K20
are associated with each ton of paper.
REQUIRED:
1) Assuming that paper is sold in a competitive market, graph the PMB and the PMC curves
2) What is the market price and how many tons of paper will be produced per year at that price?
3) Graph in the SMC curve and determine the price of the socially inefficient output given the marginal damage.
4) What would be the efficient price and the efficient annual output of paper at that point where the SMB curve is equal to the SMC curve?
5) What would be the deadweight loss of the socially inefficient output given the marginal damage?
6) How can a corrective tax achieve efficiency in this example?
If come of increase by 25%, how this increase in income will affect purchases of new cell phone and second hand bicycle?
A) A firm has issued three bonds at different points of time with total values of Rs.5 crore,
Rs.10 crore, and Rs.10 crore with different coupon rates of 8%, 10% and 12% respectively. It
calculated the average cost of debt as 10.4% (shown below) and used it in the computation of
WACC. Was the firm right in using such a method? Comment.
[(5÷25)*8%]+[(10÷25)*10%]+[(10÷25)*12%] = 10.4%
b) A financial analyst opined that a firm must never borrow because borrowing can never be
beneficial to shareholders. Fixed charges of intertest would deplete the cashflows to
shareholders, and thus, they would always be poorer, when compared to shareholders of
unlevered firm, by the amount of interest paid. Do you agree with the statement? Explain
your contentions.
QUESTION
(a). ABC's stock has a 50% chance of producing a 35% return, a 30% chance of producing a 10% return, and a 20% chance of producing a 28% return. What is ABC's expected return and standard deviation?
(b). XYZ's stock had a required return of 11.50% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Now suppose there is a shift in investor risk aversion, and the market risk premium increases by 2%. The risk-free rate and XYZ's beta remain unchanged. What is XYZ's new required return? (Hint: First calculate the beta, then find the required return.)
(c).Consider the following information and then calculate the required rate of return for the Scientific Investment Fund, which holds 4 stocks. The market's required rate of return is 15.0%, the risk-free rate is 7.0%, and the Fund's assets are as follows:
Stock Investment Beta
A K200,000 1.5
B 300,000 0.50
C 500,000 1.25
D 1,000,000 0.75
QUESTION
(a). Suppose that Beet Root Company has a 10 year preferred stock issue that pays a 15% dividend. The par value of each share is K80. The stocks are currently trading for K85. The going rate of interest in the market is 12%. What is the price of these shares?
(b). ABC Company is experiencing a period of rapid growth. Earnings and dividends
are expected to grow at a rate of 18 percent during each of the next two years, 15
percent in the third year, and at a constant rate of 6 percent annually thereafter.
ABC’s last dividend, which has just been paid, was K1.15. If the required rate of
return on the stock is 12 percent, what is the price of the stock today?
(c). What is the expected price of XYZ’s stock today if XYZ company’s dividend in a year’s time is expected to be K6.00 per share and grow at 12 percent for another 4 years, then 6 percent thereafter? XYZ shareholders require a return of 10 percent on the stock.
QUESTION 1
(a). Five years ago, XYZ Company issued 10,000 (Ten Thousand) 20-year, K1,000 par value bonds at par. At that time the market rate for such bonds was at 8%. The coupon is paid annually. Today the actual market value of all the bonds together is K11,942,450. What is the yield to maturity of these bonds today?
(b). What should be the price of a K1,000 par value, 10% annual coupon rate (coupon interest paid semi-annually) bond with 8 years remaining to maturity, assuming a discount rate of 12%?
(c). You have just discovered a K1,000 par value corporate bond with a maturity of 10 years. The bond’s yield to maturity is 9% and the bond is currently selling for K743.29. What is the bond’s annual coupon rate (the bond pays coupon payments annually)?
