Corporate finance paractice exam help

2. You are given the expected returns of L'Oreal and Daimler AG, the market return, and the risk free asset. Asset L'Oreal Expected Return 16% Daimler 12% Market return 13% Risk Free Asset 3% A. Assuming that the returns are explained by the capital asset pricing model (CAPM), calculate the betas of L'Oreal and Daimler? (5 marks) B. What is the risk of a portfolio (portfolio Beta) holding L'Oreal and Daimler with an expected return the same as the market Index return? (5 marks) C. Critically discuss the main limitations of (CAPM) and compare between CAPM and The Arbitrage Pricing Theory (APT) models? (9 marks) D. Warren Buffett and several other investors earned significantly positive returns during the financial crisis, 2008- 2009. How can you explain this using the Efficient Markets Hypothesis and behavioral finance theory? (6 marks 3. A. Discuss five anomalies of market efficiency that have been detected in academic research. Taken together, do these anomalies provide concrete evidence that the market is inefficient? Why or why not? Explain. (9 Marks) B. The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then what is the price of this bond? Explain whether this bond will be traded at (par, discount or premium)? (4 Marks) C. Assume you have the opportunity to buy the stock of EDU PLC at an IPO being offered for 8 per share. Although you are interested in buying shares of the company, you are concerned about whether it is fairly priced. The following table summarises the dividend information you would expect in the future. Dividends after year 4 grow at a rate of 5% per annum to infinity. The cost of equity capital is 10%. Please use the appropriate model in order to decide whether to invest in EDU PLC's shares? (5 marks) D. Consider the following probability distribution of returns for Alpha Corporation; what are the expected return and the standard deviation for Alpha Corporation? Current Stock Stock Price in One Price ($) Year ($) Return R Probability PR $35 40% 25% $25 $25 0% 50% $20 -20% 25% (3 marks) E. Assume a $10,000 face value bond that pays a 6% coupon and matures in four years. Interest rates are 6% per annum with semi- annual compounding. The bond pays the coupon twice a year, and pays the principal on the final payment. Given this, what would be Macaulay duration? 3 2 3 4 Year 1 35p 45p 35p Dividend 25p (4 marks [TOTAL 25 MARKS 5. a) Detail and explain the three following issuing methods in an IPO; offer for sale, offer for sale by tender and placing. Identify the main differences between the approaches. (6 marks) b) Detail and explain the main features of a sale and leaseback agreement. You should then detail and explain the possible disadvantages that a company may experience with this method of raising capital. (10 marks) A manager controls a 100m portfolio. It is currently October 2019 and the FTSE is currently trading at 7,198. The manager is able in the market to secure FTSE 100 Index a December Future for a price of 7171 with a delivery date of the day after the general election result. By convention, each point of the FTSE 100 Share Index Future is worth 10. (c) Calculate how many index future contracts would be needed to fully cover the portfolio. (2 marks) (d) Detail and calculate the outcomes of the managers losses and profits on this hedging transaction in the scenario that the index rose by 10% to 7917.8 at the date of the contract completion. In your answer you should assume that the managers portfolio is fully diversified and fully reflective of general changes in the overall market. (7 marks) [TOTAL 25 MARKS]