Question 1 (total of 12 marks): Data about a company and the financial markets are given below. All rates are effective annual rates. Assume a classical tax system.

• The company has 1 million shares.
• The shares are expected to pay their next annual dividend of $20 in one year, which will grow by the 2% inflation rate every year after that.
• The beta of the companys equity is 1.5.
• The company is also funded by 2 million 10-year bonds which it just issued. Each has a $100 face value, a 4% pa yield to maturity and a 3% pa coupon rate, paid annually.
• The corporate tax rate is 30%.
• 10 year government bonds yield 1% pa and have zero coupons.
• The ASX200 market index has a total expected return of 6% pa.

Provide all answers as decimals rounded to at least 6 decimal places.

Question 1a (4 marks): Calculate the current price of one of the firms bonds.

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Question 1b (2 marks): Calculate the firms required return on equity. Give your answer as a decimal correct to at least 6 decimal places. So for example if your answer is 1.23456789%, write 0.0123456789.

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Question 1c (2 marks): Calculate the current price of one of the firms shares.

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Question 1d (2 marks): Calculate the firms debt-to-assets ratio. Give your answer as a decimal correct to at least 6 decimal places. So for example if your answer is 1.23456789%, write 0.0123456789.

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Question 1e (2 marks): Calculate the companys after-tax WACC. Give your answer as a decimal correct to at least 6 decimal places. So for example if your answer is 1.23456789%, write 0.0123456789.

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