Principle of Finance-
Question 1 - City Development Pte Ltd is evaluating two new projects to invest. The following are after tax-cash flows:
Orchard garden
|
Year (S$'000)
|
0
|
1
|
2
|
3
|
4
|
5
|
|
Cash flows
|
-15,000
|
5,500
|
2,000
|
10,000
|
-2,000
|
8,000
|
Joo Chiat Mansion
|
Year (S$'000)
|
0
|
1
|
2
|
3
|
4
|
5
|
|
Cash flows
|
-5,000
|
-2,500
|
3,000
|
2,500
|
1,500
|
4,500
|
If the cost of capital is 8%, calculate each projects:
a. Net Present Value (NPV)
b. Internal Rate of Return (IRR)
c. Discounted Payback (DPB)
d. Payback (PB)
e. Profitability Index (PI)
f. Which project(s) should be accepted ig they are independent project?
g. Which project should be accepted if there are mutually exclusive projects?
Question 2- Rolando plans to in corporate bonds. He considers purchasing the following bonds:
- Bond F has a 4% annual coupon, matures in 8 years,
- Bond G has a 6% annual coupon, matures in 8 years,
- Bond H has a 8% annual coupon, matures in 8 years,
Each bond has yield to maturity (YTM) of 6%. All bounds have $1,000 face value.
a) Indicate whether each bond is trading at a premium, at a discount or at par.
b) Calculate the price of the three bonds.
c) Calculate the current yield of the three bonds.
d) If bond H pays 8% semiannual coupon, calculate the price of bond H.
Question 3 - Mary plans to invest in the Big Dog Hedge Fund, Which has total capital of $2,050 invested in 5 stocks;
|
Stock
|
Investment
|
Stock's Beta Coefficient
|
|
F
|
500
|
0.1
|
|
G
|
250
|
1
|
|
H
|
300
|
0.3
|
|
I
|
600
|
1.5
|
|
J
|
400
|
1.2
|
Big Dog beta coefficient can be found as a weighted average of its stock's betas. The risk-free rate is 5%, and you believe the following probability distribution for future market returns is realistic:
|
Probability
|
Market Return
|
|
0.3
|
20%
|
|
0.2
|
-10%
|
|
0.2
|
5%
|
|
0.3
|
15%
|
a) What is the equation for the Security Market Line (SML)?
b) Calculate Big Dog's weighted average stock's beta.
c) Calculate Big Dog's required rate of return.
d) Suppose Donald Dog, the CEO, receives a proposal from a company seeking new capital. The amount needed to take a position in the stock is $5 million, it has a expected return of 10%, and its estimated beta is 1.50. What is the new required return? Should he invest in the new company?
e) Suppose Donald Dog, the CEO, receives revised risk-free rate of 3% and market return of 6%. What is the revised required return? Should he invest in the new company mentioned in part c that return of 10%?
Question 4 - KBL Incorporation's capital structure consists of bond, common stock and preferred stock.
The current market price of the bond is $130 and the annual coupon payment is 15%. The par value of the bond is $100 and there are 10 years left to maturity. Tax rate is 20%.
The preferred stock pays a dividend of $3.0. The current stock price is $30.
The common stock pays dividend of $2.60 per share last year, and its stock currently sells for $35 per share. Dividends are expected to grow at a constant rate of 8% in the future.
a) Calculate the cost of debt after tax.
b) Calculate the cost of preferred stock
c) Calculate the cost of common stock
a) If the number of bonds, preferred stocks and common stocks outstanding are 50 bonds, 100 shares and 200 shares respectively, calculate the weight of each capital component
b) Calculate the Weighted Average Cost of Capital (WACC).
c) KBL has the following investment opportunities;
|
Project
|
Cost at t = 0
|
Rate of Return
|
|
A
|
$1,500
|
10.00%
|
|
B
|
$550
|
12.40%
|
|
C
|
$4,500
|
11.80%
|
|
D
|
$800
|
6.00%
|
|
E
|
$1,200
|
17.50%
|
|
F
|
$1,850
|
9.00%
|
|
G
|
$1,200
|
7.50%
|
If the company has limited capital of $6,000 capital, which project(s) should in invest? Why?