Dear 891 tutor, please help me how to get the result of every question.

Page 1 of 7 FINC 5001 Capital Markets and Corporate Finance Practice Final Exam Suggested time: 150 minutes Page 2 of 7 Question 1 (20 marks) Modigliani and Miller (M&M) hypothesized that both dividend policy and capital structure policy are irrelevant in determining the value of a firm. Outline the arguments they used to reach their positions, including the assumptions underlying those arguments. With reference to relevant academic literature, discuss why the M&M hypotheses might not hold in practice. Page 3 of 7 Question 2 (25 marks) Sovereign Ltd (SOV) declared a dividend of $0.40 on 10 March 2009. Sovereign's shares will go ex-dividend on 6 April 2009. It had previously declared a dividend on 14 September 2008. The share price, index and bond data around the time of the dividend declaration were as follows. Date Sovereign Index (pts) Stock Price ($) 2 March 2009 3 March 2009 4 March 2009 5 March 2009 6 March 2009 9 March 2009 10 March 2009 11 March 2009 12 March 2009 2.44 2.42 2.39 2.41 2.45 2.66 2.89 3.20 3.34 4320 4352 4299 4333 4358 4410 4450 4397 4431 Accumulation 10 year Index (pts) Government 10589 10659 10549 10660 10711 10854 10946 10835 10914 Bonds (% p.a.) 5.48 5.44 5.34 5.41 5.50 5.49 5.46 5.47 5.45 Market analysts have determined that the standard deviation of excess daily returns of SOV is 1.43%, whilst the standard deviation of the excess daily returns on the Index is 0.47% and the Accumulation Index is 0.48%. The coefficient of correlation between SOV and the Index is 0.64, whilst the coefficient of correlation between SOV and the Accumulation Index is 0.58. Page 4 of 7 (i) Using this information, determine the abnormal returns for SOV on each of the days from 3 March 2009 to 12 March 2009. Present your calculations in a table format. (ii) (15 Marks) Assuming that no other information reached the market during this period, are the results you have obtained consistent with the Efficient Market Hypothesis? Explain your answer referring to academic research you have studied in this course. (10 Marks) Page 5 of 7 Question 3 (30 marks) Xentia Technologies Group (XTG) is considering investing in developing new 4D television technology. The CEO of XTG, Ms Jane Smith, has appointed you to evaluate the proposal for the board. If the new project goes ahead it is expected that it be operational at the beginning of year 2 (with the first revenues generated by the end of that year). Once the new project is operational it will render the company's existing 2D technology project obsolete. The new project is then expected to have an operating life of six years. To assist you in evaluating the project the following information has been prepared: Existing 2D technology project: Constant annual earnings before depreciation and taxes (EBDIT) $400,000 Annual depreciation expense on equipment $0 (Equipment fully depreciated) Annual working capital balance $200,000 Expected salvage value of equipment if rendered obsolete $0 New 4D technology project: New equipment outlays (immediate) $10,000,000 Expected constant EBDIT $3,800,000 (In the first year of operation) Annual depreciation rate on equipment (straight line) 10% p.a. Expected salvage value of equipment at the end of the project $3,500,000 Working capital requirement (once project is operational) $300,000 Page 6 of 7 Additional Information: 1. Company tax rate is 30% 2. Xentia is financed with $25 million in market value of debt and $50 million in market value of equity. 3. Xentia has a beta of 1.6. 4. Revolutionary Technology Corporation (RTC) is currently using technology that is similar in risk profile to the new 4D project. 5. RTC is financed with $40 million in market value of debt and $40 million in market value of equity. 6. RTC has a beta of 1.75 7. Xentia borrows debt capital at a cost of 8% p.a. compounded semi-annually 8. The long term market risk premium (including franking credits) is 9.75% p.a. 9. The current yield on Commonwealth Bonds is 4.25% p.a. 10. Xentia operates in an imputation tax system. Required: i) What is the appropriate discount rate that should be used to evaluate the project? Explain your decision. ii) Calculate the NPV of the project. Present the cashflows used in the NPV calculation in a table. iii) (5 marks) (20 marks) Advise whether you should recommend the project. Explain your decision. (5 marks) Page 7 of 7 Question 4 (20 marks) Axis Financials Group Ltd (AFG) has performed well in recent years and financial analyst, Mr Bright-Laad, predicts the following possible outcomes for the company next year: State Very Good Good Average Bad i) Probability 0.4 0.3 0.2 0.1 Return 20% 15% 10% -5% Calculate the expected return and standard deviation of returns on AFG Ltd. (5 marks) Two other investments, Titan Property Management Ltd (TPM) and 10-year Commonwealth Bonds, have been recommended by Mr Bright-Laad as an option for a three asset portfolio. The expected return and standard deviation of these securities are given below: TPM Commonwealth Bonds E(Ri) 15% 10% 8% 0% The correlation between AFG and TPM = -0.8 The correlation between and AFG and Commonwealth Bonds = 0 The correlation between TPM and Commonwealth Bonds = 0 ii) You are considering investing in all three securities in an equally weighted portfolio. Use the above data to find the expected return and variance of the portfolio. (10 marks) iii) Does the inclusion of all three stocks (in the portfolio created in part ii) provide the best outcome for the investor who seeks to minimise their risk? Explain your answer (no calculations required). (10 marks)