1) You are told by your investment advisor that Laduma Co. is expected to earn $5 per share next year, $6 per share the following year and that thereafter earnings are expected to grow by 8 percent per year. The dividend payout ratio is 60 percent and the required rate of return on Laduma shares is 15 percent. If the current share price is $40, would you expect your adviser to make a buy, hold or sell recommendation? If transaction costs are $2,50 per share, would you follow his advice? (10 marks)

2) You are interested in Speculative Holdings which is currently trading at a market price of $4.2 per share. You expect it to achieve earnings next year of $3,420,000 and project a dividend next year of $0.137 per share. The firm has 10 million shares in issue and you estimate that you would require a return of 12% on this investment. What position would you take on Speculative Holdings? (7 marks)

3) Lizo Business Solutions, an industrial business concern, is financed by equity, debt and preference stock. The company has 50 million outstanding shares with a par value of $1 each. The shares are listed on the stock exchange and recently paid a dividend of 220 cents. The dividend has been growing at a steady rate of 5 percent over the years, and market analysts believe this growth rate is sustainable and will therefore continue for the foreseeable future. The company's beta is 1. Lizo also has 100 000 bonds in issue. The debt is listed on the exchange, and currently trades at a yield-to-maturity of 8 percent. The debt has a par value of $1 000 each and pays a coupon of 10 percent per annum paid semi-annually. The debt has four years remaining to maturity.

What is the value of Lizo Business total debt? (4marks)

4) Bonds of TLM Corporation with a par value of $1000 sell for $960, mature in five years,and have a 7% annual coupon rate paid semi-annually.

a)Calculate the current yield and the yield to maturity (4)

b)Assume a 10-year, $1,000 par value bond with a 10 percent annual coupon if its required rate of return is 10 percent what is the value of the bond? (3)

i) What would be the value of the bond described in part b if, just after it had been issued, the expected inflation rate rose by 3 percentage points? Would we now have a discount or a premium bond? (3)

ii) What would happen to the bonds' value if inflation fell, by 3 %? Would we now have a premium or a discount bond? (3)

5)Lumo is a trader at ZNF Equity traders and has just identified a stock, UFSI Limited, which is currently trading at $25 per share. Lumo decides to take a long position in at-the money put option and simultaneously buys one share of UFSI stock. The put option expires in 3 months' time and costs $2.5 per share. Assume a contract consists of one put option.

Required:

a)Identify the strategy employed by Lumo above. (2)

b)Tabulate the Profit to the strategy at expiration for the following(8)

i)Exercise price $30; Stock price 20.

ii)Exercise price $30; Stock price 35.

6)Your firm is one of the largest bakery's in the area. As part of your risk management process, you are considering using options to hedge the price risk on your biggest input - wheat. You have determined that a price of $52/per ton would allow for you to keep the same profit margin as last year. The following wheat options offer a strike price of $50/per ton expiring in 1 month:

• Call options on wheat are selling at a premium of $0.87 per ton.
• Put options on wheat are selling for $0.72 per ton.

a)Given the information above, will you need a call or a put option? [1 mark]

b)If each option is for 100 tons, and you require 1000 tons of wheat, demonstrate the outcome if, at expiry, the spot price of wheat is (i) $40 per ton and (ii) $60 per ton. [12 marks].