[All final answers should be stated in 2 decimals in $ / %.] *list out full steps*

Question 1(12 marks/Bond Valuation)

You intend to buy a bond issued by C&C Inc. The bond has 15 years remaining to maturity, $1,000 par value and is paying 8% annual coupon.

(a) How much will you pay for the bond if its YTM is currently 7%? (4 marks)

(b) One year later, the bonds YTM has risen to 10%. What are the current yield, capital gains yield and total yield of your bond investment? (8 marks)

Question 2 (6 marks / Stock Valuation)

It is expected that the common dividends of Company ABC in the coming three years will be $9, $8 and $7 respectively. Starting from the fourth year, it is believed that the common dividends will grow at a constant rate of 10%. How much should the stock of Company ABC be worth today if the rate of return is 15%?

Question 3 (7 marks / Cost of Capital)

XYZ Corporation has a target capital structure of 50% common stock, 5% preferred stock, and 45% debt. Its cost of equity is 18%, the cost of preferred stock is 6.5% and the cost of debt is 8%. The relevant tax rate is 35%.

(a) What is XYZs weighted average cost of capital (WACC)? (4 marks)

(b) Why did the firm not use more preferred stock financing since it costs less than debt? (3 marks)

Question 4 (23 marks/Risk, Return and CAPM)

Theo has $600,000 to invest and is considering the merits of two securities. She is interested in the common shares of Corporation X and Corporation Y. The possible annual rate of return of security is shown as below:

Possible Annual Rate of Return of Security in 2018:

State of Affair	Probability	Stock X	Stock Y
Boom	0.2	25%	-5%
Normal	0.6	15%	10%
Recession	0.2	-10%	20%

Each part is independent

(a) Calculate the expected rate of return and variance of rate of return of Stock X and Stock Y. (8 marks)

(b) Assuming the weight of Stock X is 30% and the weight of Stock Y is 70%, calculate the expected rate of return and variance of the portfolio. Compare the portfolio risk with the risk of the stocks and explain the difference, if any. (10 marks)

(c) If the risk-free rate is 2%, the market risk premium is 10%, the beta of Stock X is 1.8 and the beta of Stock Y is 1.2, calculate the beta and the required rate of return of the portfolio as stated in part (b). And determine whether the portfolio is overpriced or underpriced. (5 marks)

Question 5 (27 marks/Capital Budgeting)

LTT Technology Company Ltd plans to open a new factory in Thailand, which is expected to have a 6- year economic life. The following cash flows are noted for the project:

1. The factory will be built on a piece of land freely provided by the Thail government.

2. The factory will be constructed at a cost of $18 million. The factory will be depreciated at its full cost on a straight line basis over its estimated useful life of 12 years. The factory can be sold at $5 million at the end of Year 6.

3. Machinery will have to be purchased for the factory at a cost of $6 million. For tax purpose, machinery will be fully depreciated at its full cost (i.e. to zero value) on a straight-line basis over its estimated useful life of six years. Salvage value of the machinery at the end of Year 6 is 10% of its original cost.

4. Equipment will also have to be purchased at a cost of $1,200,000. Equipment will also be depreciated at its full costs on a straight-line basis over its estimated useful life of six years. Its salvage value is equal to zero.

5. In addition, an initial investment of $2 million in working capital is required today and at the end of Year2. The working capital will be fully recovered at the end of project.

6. Under the new tax rules in Thailand, LTT will receive a tax rebate of $500,000 as an incentive to undertake an investment project in Thailand at the end of Year 6. The management of LTT believes that the new factory will generate pre-tax cash operating income of $8 million a year in its first two years of operation and $16 million in each of the subsequent 4 years. LTTs corporation tax rate is 40% and its cost of capital is 15%. Round your answer to nearest dollar

a) Calculate the cost of investment. (4 marks)

b) Calculate the present value of after-tax cash operating income. (6 marks)

c) Calculate the present value of tax savings from depreciation. (6 marks)

d) Calculate the present value of after-tax salvage value. (6 marks)

e) Based on the net present method, should the project be undertaken? (5 marks)