1. a) List and explain the factors that determine the value of an asset. [3 marks]

b) Define risk and return in the context of business finance. How do they affect the maximisation of shareholders wealth? [5 marks]

c) The market rate of interest for a certain class of debentures is 4 per cent. It is possible to identify the following four debentures in the market that meet the requirements of the class. The face value of these debentures is $100. Coupon rate on issue % Big Gun 3.5 Toy Soldier 3.0 Rumbler 5.0 Gatsby 6.0

i. If the only characteristic of the debentures that is different is the coupon rate, rank the debentures from high to low in terms of market price. [2 marks]

ii. How would the ranking change (if at all) if the terms to maturity are as follows? [5 marks] Big Gun 3 years Toy Soldier 6 months Rumbler 2 years Gatsby 1 year 2. a) Explain the differences between the coupon rate and the discount rate. How are they related to each other? What are determinants of a bonds value? [5 marks]

b) A new firms share is expected to cash dividends of $0.50 at the end of its first year of business, $0.75 at the end of the second and third year, $1.00 at the end of years four and five, and $1.25 in year six and for each year thereafter for the foreseeable future. If the required rate of return is 14%, what is the approximate current market value of this firms ordinary shares? [5 marks]