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Question 9

A firm has a debt-to-equity ratio of 1:1.

The firms debt beta is 0.3.

Five-year government bonds yield 5% pa with a coupon rate of 4% pa. The market's expected dividend return is 4% pa and its expected capital return is 6% pa.

The firm stocks next dividend is expected to be $2, paid one year from now. Dividends are expected to be paid annually and grow by 1% pa forever. The current stock price $10.

The corporate tax rate is 30%. Assume a classical tax system.

Which statement is NOT correct?

a. The beta of the firms assets is 1.75.

b. The beta of the firm's equity is 3.2.

c.The expected return on equity is 21% pa.

d. The expected return on debt is 6.5% pa.

e.The firms after-tax WACC is 13.75% pa.

Question 10

A firm pays a fully franked cash dividend of $50 to one of its Australian shareholders who has a personal marginal tax rate of 20%. The corporate tax rate is 30%.

What will be the shareholder's personal tax payable due to the dividend payment?

a. -7.1429

b. 21.4286

c. 14.2857

d. -5

e. 10

Question 11

A company conducts the following capital payout and raising policies. Assume that there are no taxes, no signalling effects and no transaction costs.

Which one of the following statements is NOT correct?

a. 1 for 3 bonus issue will increase the number of shares by 33.33% and decrease the share price by 25%.

b. Cash dividends mean that shareholders receive money.

c. 1 for 6 rights issue at a subscription price of $2 when the pre-announcement stock price was $5, will increase the number of shares by 16.67% and decrease the share price by 8.57%.

d. 15% stock buy-back will decrease the number of shares by 15%.

e. 7 for 4 stock split will increase the number of shares by 57.14% and decrease the share price by 75%.

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