Giggle Inc. had a FCFE of $246M last year and has 123M shares outstanding. The company's WACC is 9% and required return on equity is 10% per year. If the FCFE is expected to grow at 8% forever, what is the intrinsic value of Giggle's shares? (5 marks) b) Boris has borrowed $20,000 on margin to buy shares in ABC Inc., which is now selling at $40 per share. Boris account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price falls to $35 per share. i) Will Boris receive a margin call? Show your calculation. (4 marks) ii) How low can the price of ABC shares fall before Boris receive a margin call? (3 marks) c) SpaceTech Ltd. is expected to pay a per-share dividend next year of $30. The markets consensus is that the firms dividend growth rate of 2% per year (which has been going on for many years) will be maintained in the foreseeable future. SpaceTechs cost of equity is 10% per year. i) What is the price of a share of SpaceTech? (3 marks) SpaceTech has the expected dividend growth of 2% because its return on equity is 8% and management retains 25% of the earnings. ii) What is the earnings per share of SpaceTech next year? (2 marks) iii) What is the present value of growth opportunities per share of SpaceTech? (3 marks) Suppose SpaceTech is about to announce that it will increase its retention ratio to 50%, effective immediately. iv) What will be the new value of the stock after the change in policy? (5 marks) (d) Is the following statement true or false? Briefly explain your answers. If a firm announces an unexpectedly large cash dividend, the EMH would predict a gradual price change to occur for several weeks after the announcement. (3 marks) Question 2 (22 marks) The following table contains information of several corporate bonds. a) What is the effective duration (ED) of Bond A for a 100bp (50+/50-) change in yield? (9 marks) b) If you expect the interest rate to drop by 60bp, what is the percentage change in the price of Bond A as estimated by effective duration? (3 marks) c) If the interest rate rises, will the actual price of Bond B be higher or lower than the estimated price based on duration approximation? ONLY brief verbal explanation is required. (2 marks) d) Assume Bond C and Bond D are identical except for their bond ratings. Without any calculation, determine which bond should you purchase (Bond C or Bond D) now if you expect the interest rate to go down in the coming period. Explain briefly. (3 marks) e) Without any calculation, determine which of the five bonds in the table has the highest interest rate risk. Explain briefly. (3 marks) f) If the YTM of Bond E remains unchanged in the coming year, how will its effective duration change one year from today? Explain briefly. (2 marks) ~