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The rate of return for bonds issued by the Australian Commonwealth Government Treasury is given as 2% per annum. The return for the Australian share market is given as 12% per annum. Suppose a listed company has a beta value of 0.8. The dividend payments for the company are expected to grow at 6% per year.

(a) Calculate the market premium. (2 marks)

(b) Calculate an investor’s required rate of return for the company’s shares. (3 marks)

(c) Calculate the intrinsic value of a share in the company if this year’s dividend (the current

dividend) is $3 per share. (3 marks)

(d) Using your answer to part (c), if the market price of a share in the company is $70, would you

buy shares in the company? Explain your answer. (2 marks)

(e) Calculate the intrinsic value of a share in the company if last year’s dividend was $3 per

share. (4 marks)

(f) Calculate the intrinsic value of a share in the company if next year’s dividend is predicted to

be $3 per share. (2 marks)

(g) Explain why Australian Commonwealth Government Treasury Bonds are considered to be

risk-free. (2 marks)

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Reid Wolff
Reid WolffLv2
28 Sep 2019

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QUESTION 5 [Total 14 marks]

(a) A company listed on the Australian share market is expected to pay a dividend of $2 next year and it has a constant growth rate for dividends of 5% per year. The expected rate of return for shareholders is 8% per year. Calculate the price of a share in the company. (4 marks)

(b) What is the annual yield on a 4 year bond with a face value of $100,000 and annual coupon interest payments at 14% per annum if the price of the bond is $127,721? (4 marks)

(c) A sole proprietor intends to invest $30,000 in a project that will generate cash flows before tax of $8,000 per year for 5 years. Depreciation is straight line to zero (i.e. 20% per year). The estimated salvage value is $5,000. The before tax required rate of return is 10% and the sole proprietor is taxed at 40%. What is the appropriate discount rate to use in the capital budgeting analysis? (2 marks)

(d) What is the expected return on the market if the expected return on Asset A is 15%, the risk-free rate is 6% and Asset A has a beta of 0.9? (4 marks)

The following Balance Sheet extract relates to the Snapple Company:

Bonds payable $1,000,000

Common Stock $3,000,000

Preferred Stock $2,000,000

Additional Information:

 The bonds are 8%, annual coupon bonds, with 9 years to maturity and are currently selling for 95% of par.

 The company’s common shares which have a book value of $25 per share are currently selling at $20 per share.

 The company has an equity beta of 1.5 and the current Treasury bill rate is 3.5%. The market risk premium is 1.5%

 The preferred dividends are 5% preferred shares with a book value of $100 per share. These shares are currently selling at $80 per share.

 The Company’s tax rate is 35%.

a) Calculate Snapple’s cost of debt. [5 marks]

b) Calculate Snapple’s cost of equity. [5 marks]

c) Calculate Snapple’s cost of preferred shares. [3 marks]

d) Calculate Snapple’s Weighted Average Cost of Capital [8 marks]

QUESTION 1

(a) Explain what is meant by the market capitalisation of a listed company. How would you find the market capitalisation of a listed company? (3 marks)

(b) If a company has 10,000,000 ordinary shares on issue with a current market price of $3.50 per share, calculate the market capitalisation of the company. (2 marks)

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