Question 1 (15 marks) Are the following statements true or false? Briefly explain your answers. (a) 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. (5 marks) (b) If the ROE of a company is higher than its discount rate r, it would be in shareholders interest to retain earnings in the company. (5 marks) (b) If the expected return on stocks is higher than the return on the risk-free asset, a risk-averse mean-variance investor will choose to hold some stocks even if stocks' returns have a very high (but finite) variance. [Hint: Optimal weight?) (5 marks) Question 2 (15 marks) The market consensus is that Dudley Electronic Corporation (DCE) has an ROE = 9%, has a beta of 1.25, and plans to maintain indefinitely its traditional plowback ratio of 2/3. This year's earnings were $3 per share. The annual dividend has just been paid. The consensus estimate of the coming year's market return is 14%, and T-bills currently offer a 6% return. a) Estimate the value of DCE stock. (8 marks) b) Estimate DCE's P/E ratio. (3 marks) c) Estimate DCE's present value of growth opportunities. (4 marks) Question 3 (6 marks) TTY International had a FCFF of $122.1M last year and has 12.43M shares outstanding, TTY'S required return on equity is 11.3% and WACC is 9.8%. If FCFF is expected to grow at 7.0% forever, what is the value of TTY? Question 4 (14 marks) Simon has borrowed $20,000 on margin to buy shares in ABC Inc., which is now selling at $40 per share. Simon's 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. a) Will Simon receive a margin call? Show your calculation. (9 marks) b) How low can the price of ABC shares fall before Simon receive a margin call? (5 marks) Question 1 (15 marks) Are the following statements true or false? Briefly explain your answers. (a) 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. (5 marks) (b) If the ROE of a company is higher than its discount rate r, it would be in shareholders interest to retain earnings in the company. (5 marks) (b) If the expected return on stocks is higher than the return on the risk-free asset, a risk-averse mean-variance investor will choose to hold some stocks even if stocks' returns have a very high (but finite) variance. [Hint: Optimal weight?) (5 marks) Question 2 (15 marks) The market consensus is that Dudley Electronic Corporation (DCE) has an ROE = 9%, has a beta of 1.25, and plans to maintain indefinitely its traditional plowback ratio of 2/3. This year's earnings were $3 per share. The annual dividend has just been paid. The consensus estimate of the coming year's market return is 14%, and T-bills currently offer a 6% return. a) Estimate the value of DCE stock. (8 marks) b) Estimate DCE's P/E ratio. (3 marks) c) Estimate DCE's present value of growth opportunities. (4 marks) Question 3 (6 marks) TTY International had a FCFF of $122.1M last year and has 12.43M shares outstanding, TTY'S required return on equity is 11.3% and WACC is 9.8%. If FCFF is expected to grow at 7.0% forever, what is the value of TTY? Question 4 (14 marks) Simon has borrowed $20,000 on margin to buy shares in ABC Inc., which is now selling at $40 per share. Simon's 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. a) Will Simon receive a margin call? Show your calculation. (9 marks) b) How low can the price of ABC shares fall before Simon receive a margin call
