Question1.

"If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio with a pin." Explain why this is not the case. 1000 words.

Question2.

DillLtdcurrent share price is $20 and it has just paid a $2.50 dividend. Dividends of Dill are expected to grow at the rate of 6% per year.

A. What is an estimatedreturn that shareholders of Dill expect to earn?

B. Dill Ltd also has preference share outstanding that pays fixed dividend of $2 per share. If preference stock is currently priced at $16, what is the return that preference share holders expect to earn?

C. Five years ago Dill Ltd issued 13 year bond with face value of $1000 and coupon rate of 7.5% p.a. The price of these bonds iscurrently $950. What is Dill's relevant cost of debt?

D. Dill has a 12% Bank loan and the currentoutstanding balance on the loan is $12,000,000, interest on the loan is compounded monthly.

E. Dill Ltd has 5000,000 ordinary shares outstanding and 1,500,000 preference shares outstanding, and its equity has a total book value of $50,000,000. Its liability has a book value of $25,000,000. If Dill's ordinary and preference shares are priced as in parts (A) and (B) above,what is the market value of Dill's assets?

F. What is Dill's weighted average cost of capital (WACC)

G. Tax rate is 30%.