1 Nat T Cat Industries just went public As a growing firm, it is not expected to pay a dividend for the first five years After that, investors expect Nat T Cat to pay an annual dividend $1 00 per share (i e , D6 1 00), with no growth If the current market price for this stock is $ 14, would you like to invest it 2 A bond pays $80 per year in interest (8 coupon) The bond has 5 years before it matures at which time it will pay $1,000 Assuming a discount rate of 10 , however the compounding frequency is semi annually, should the price be higher or lower than that in question a Why Without calculation 3 A sports marketing company has debt outstanding with a book value of $5 5 million and are currently trading in the market at 84 to their book value The cost of debt is 7 5 p a It also has 500,000 shares on issue with the market value of $8 95 per share The risk free rate in the market is 3 and the expected market return is 11 p a Given an estimated beta of 1 3 and a company tax rate of 30 , what is the WACC for the sports marketing company 4 a A borrower requires $1,000,000 today to pay for some inventory A bank is prepared to provide the financing in form of a 270 day bank accepted commercial bill at a yield of 3 95 p a How much would the company have to pay back in 270 days time A commercial bill is an example of what is referred to as a discount security Explain what is meant with a discount security and what are the markets into which it is issued How does an investor make money on such securities Identify 2 other discount securities in addition to commercial bills 5 The Australian Office of Financial Management (AOFM) unveiled this week the Australian governments first ever launch of 30 year T bonds The bonds are to pay an indexed rate or, variable rate, of 1 to 1 07 over the implied return of 10 year bonds which as at the date of this report was 2 21 The AAA rated bond tenders are likely to attract life insurance companies from around the world keen to match their long term liabilities with well rated income securities (AFR 11 Oct 2016) Outline the tender process of Australian government bonds and why perhaps life insurance and superannuation companies might seek to invest in them (4 marks) What impact does the fact that Australia still has managed to hang on to its AAA rating have on the bonds being issued (3 marks) Assuming as an investor rather then investing in T bonds you chose to invest in T notes, what would be the face value of a 180 day T note given a yield of 1 66 p a and a purchase price of $5,000,000 (3 marks)

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1. Nat-T-Cat Industries just went public. As a growing firm, it is not expected to pay a dividend for the first five years. After that,

1. Nat-T-Cat Industries just went public. As a growing firm, it is not expected to pay a dividend for the first five years. After that, investors expect Nat-T-Cat to pay an annual dividend $1.00 per share (i.e., D6 = 1.00), with no growth.

If the current market price for this stock is $ 14, would you like to invest it ?

2. A bond pays $80 per year in interest (8% coupon). The bond has 5 years before it matures at which time it will pay $1,000.

Assuming a discount rate of 10%, however the compounding frequency is semi-annually, should the price be higher or lower than that in question a? Why? Without calculation.

3. A sports marketing company has debt outstanding with a book value of $5.5 million and are currently trading in the market at 84% to their book value. The cost of debt is 7.5% p.a. It also has 500,000 shares on issue with the market value of $8.95 per share. The risk free rate in the market is 3% and the expected market return is 11% p.a. Given an estimated beta of 1.3 and a company tax rate of 30%, what is the WACC for the sports marketing company?

4. a. A borrower requires $1,000,000 today to pay for some inventory. A bank is prepared to provide the financing in form of a 270-day bank accepted commercial bill at a yield of 3.95% p.a. How much would the company have to pay back in 270 days time?

A commercial bill is an example of what is referred to as a discount security. Explain what is meant with a discount security and what are the markets into which it is issued? How does an investor make money on such securities? Identify 2 other discount securities in addition to commercial bills?

5. The Australian Office of Financial Management (AOFM) unveiled this week the Australian governments first ever launch of 30 year T-bonds. The bonds are to pay an indexed rate or, variable rate, of 1% to 1.07% over the implied return of 10 year bonds which as at the date of this report was 2.21%. The AAA-rated bond tenders are likely to attract life insurance companies from around the world keen to match their long term liabilities with well rated income securities. (AFR 11 Oct 2016)

Outline the tender process of Australian government bonds and why perhaps life insurance and superannuation companies might seek to invest in them. (4 marks)
What impact does the fact that Australia still has managed to hang on to its AAA rating have on the bonds being issued? (3 marks)
Assuming as an investor rather then investing in T-bonds you chose to invest in T-notes, what would be the face value of a 180-day T-note given a yield of 1.66% p.a. and a purchase price of $5,000,000? (3 marks)