Goldencat Property Management, a London-based company, has 1 million common shares outstanding. The company's revenue has historically increased at q = 5% per year and reached 2 million at t = 0. By 0, the company's stock price was fixed at around £10 per share. Dividend per share in period 0 is D0 = 1. The required rate of return for the ordinary shareholder in period 0 is rcs,0 = 15%,

A. Suppose the expected return of the market portfolio is E(rm) = 11% and the risk-free rate is rf = 3%. What is the beta of Goldencat according to CAPM?

B. Goldencat has an existing loan relationship with Libertyville Bank in Brussels, Belgium. At the beginning of t=0, the remaining balance of the loan is 10 million and must be paid in equal installments over 20 years. Refunds must be made at the end of each term. This loan has an APR of 5% and interest is compounded annually. What is the company's debt payment in period 0?

C. The company's earnings are income excluding debt repayment. What is the company's net actual earnings per share in period 0? What is the company's dividend payout rate in period 0?

D. Fixed dividend growth rate valuation model, Pt = (Dt?1 ·(1+g)) / rcs ? g, where g is the expected dividend growth rate. To the extent that you believe this model is correct, what do you think the market expected dividend growth rate g is if P0 = 10?

E. At the end of period 0 and the beginning of period 1, there are reports that Wolverine estate management, a Glasgow-based company, has filed a business suit against Goldencat. If Goldencat wins the case, the firm's revenue projection and dividend projection remain the same as before. If Goldencat loses the legal battle in period 1, the company's revenue in period 1 will drop to 750,000 and a new but slower q? = 2%.

I. Explain why the Goldencat company might go bankrupt if it loses the case.

ii. Due to the lawsuit, Goldencat's stock price drops from P0 = 10 to P1 = 5. Explain the reasons for this price drop in terms of a fixed dividend growth rate valuation model. What factors contribute to the price drop?

F. Goldencat's CFO went to Brussels and renegotiated a new loan agreement with Libertyville Bank at the beginning of term 1. The purpose of this type of renegotiation is to ensure that Goldencat can maintain its solvency in the future should it lose the case. Goldencat was able to take out a new $10 million loan from the Bank, a large portion of which was used to pay off the remaining balance of its existing loan. The portion exceeding the remaining balance was paid to the bank as a “prepayment penalty”. The terms of the new loan are such that Goldencat has to pay 700 thousand installments every year for 50 years.

Required:

I. Calculate the implied interest rate on the new 50-year loan.

ii. Calculate the amount of "prepayment penalty" Libertyville Bank has imposed on Goldencat as a result of the loan renegotiation.

iii. Explain why debt negotiation is mutually beneficial to both Goldencat and Libertyville Bank.

Goldencat CEO G. Jeffery announced that the company has issued 1 million preferred shares at the beginning of period 1 at an initial public offering price of Pps = 5. per term (year). Jeffery's wealthy Liverpool grandfather, Timothy, bought all these preferred stocks. Calculate Timothy's required rate of return for the preferred stock. Remember from part (a), the risk-free rate is 3%. The general public believed that Timothy was doing Jeffery a financial favor. Do you agree? To explain.