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Economics
Mary borrows $80,000 to buy her home. Beginning next month she will pay the
lender $720 per month for the next 20 years. What is the ROR? (Hint: 20 years = 240
months. Calculate the monthly interest rate first, then multiply by 12 to obtain the annual
percentage rate, APR).
lender $720 per month for the next 20 years. What is the ROR? (Hint: 20 years = 240
months. Calculate the monthly interest rate first, then multiply by 12 to obtain the annual
percentage rate, APR).
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?
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.
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.
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?
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?
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?
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?
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?
5
Assume, in an industry where there are no barriers to entry and firms are making an economic loss in the short run.
a) What options are available to firms in the short run to minimise their losses.
b) Using demand and supply analysis together with the cost curves, explain why the actions to minimise loss lead to firms’ making normal profit in the long run?
6
In a market structure where firms are mutually interdependent, price competition is not common. Explain using the game theory matrix, with relevant assumptions, how firms make decisions when they behave collusively and non-collusively. In the absence of price competition, how do firms maintain or increase their market share?
Assume, in an industry where there are no barriers to entry and firms are making an economic loss in the short run.
a) What options are available to firms in the short run to minimise their losses.
b) Using demand and supply analysis together with the cost curves, explain why the actions to minimise loss lead to firms’ making normal profit in the long run?
6
In a market structure where firms are mutually interdependent, price competition is not common. Explain using the game theory matrix, with relevant assumptions, how firms make decisions when they behave collusively and non-collusively. In the absence of price competition, how do firms maintain or increase their market share?
3
The outbreak of Bird Flu in 1997 resulted in the Hong Kong government ordering the culling of more than 1.5 million chickens. The culling of chickens was simultaneously accompanied by consumers reducing their demand for life chickens due to the bird flu. Using demand and supply analysis, what was the impact on price and quantity in the market for life chickens?
4
Assume the price of a good increase from $6 to $8, leading to a fall in quantity demanded from 50 to 40 units. Calculate the price elasticity of demand for the good at this price range and explain how total revenue will be impacted by the increase in price?
The outbreak of Bird Flu in 1997 resulted in the Hong Kong government ordering the culling of more than 1.5 million chickens. The culling of chickens was simultaneously accompanied by consumers reducing their demand for life chickens due to the bird flu. Using demand and supply analysis, what was the impact on price and quantity in the market for life chickens?
4
Assume the price of a good increase from $6 to $8, leading to a fall in quantity demanded from 50 to 40 units. Calculate the price elasticity of demand for the good at this price range and explain how total revenue will be impacted by the increase in price?
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#333702 on Dec 2022
#333702 on Dec 2022