Business studies /Accounting / portfolio management.

1. (A). A firm had just paid dividend at OMR 2 per share. The growth in dividends is estimated by the company to be 3% p.a. The required rate of return of equity investors is 15.5%. Calculate the estimated market price of the equity share. (B). In 2011, a newspaper lists a bond AT&T as 6535 and its price as 105. Find the approximate yield to maturity for this bond. XYZ expects a net operating income (EBIT) of 40% on total assets of OMR 1,500,000. It has OMR 1,000,000, 4% debentures. The overall capitalization rate is 10%. Calculate the value of firm, value of the equity and equity capitalization rate (cost of equity) according to the net operating income approach. Verify the overall cost of capital (WACC). 3. Companies U and I are identical in every respect, except that U is unlevered while Lis levered. Company Lhas OMR 2,000,000 of 8% Debt outstanding. Assume that all the MM assumptions are met, the tax rate is 50%, EBIT is OMR 600,000 and that equity-capitalization rate for company U is 10%. What would be value for each firm according to MM's Approach, Calculate L firm's cost of Equity and Overall cost of capital of L firm? 4.(A). The Oasis Company is deciding to issue 2,000,000 of OMR 100, 4.5%, 7-year preferred stocks. Further, an underwriting fee of 5% of the face value will be paid by the firm. Assume that a 15% tax rate. Calculate cost of preferred stock, if the stocks are sold at a premium of 10% and matures at a premium of 20%. (B). ABC Company issues 15% Bonds of face value of OMR 100 each, redeemable at the end of 5 years. The Bonds are issued at a discount of 5% and the flotation cost is estimated to be 3%. Find out the cost of debt given that the first has 15% tax rate. Answer All Questions: 1. Under which of following approach valuation of a bond is based on net assets? And explain the approach. [2 Marks] 2. You are thinking to buy SMC 4.25s20 bonds, priced at 88. The bonds pay interest semiannually. If the required rate of return is 8%, would you buy these bonds in 2015? 12 Marks] 3. A bond of OMR 100 bearing coupon rate of 3% and redeemable in 5 years at is being redeemed at OMR 102. Determine the YTM of the bond. [2 marks] 4. (A). The current price of Ford stock is OMR 50 a share and it has paid dividend of OMR 4 this year. The growth rate of dividends is 8%. What is the required rate of return for equity shareholders? [2 Mark] (B). What do you understand by Yield to Maturity? [1 Mark] Reyan Co stock has just paid its annual dividend of OMR 2.250. The expected growth rate is 5% in the near future. Calculate the expected amount of dividend by the end of the year. [1 Mark]