QUESTION 2 ANSWER ALL PARTS OF THIS QUESTION

a. What is the future value of 1,710 in 13 years assuming an interest rate of 7.5 percent compounded semi-annually?

[3 marks]

b. E-Eyes.com has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a 20 dividend per year, but the first dividend will not be paid until 20 years from today. If you require a return of 8.25 percent on this stock, how much should you pay today for it? [

5 marks]

c. The next dividend payment by Hoffman Plc will be 3.10 per share. The dividends are anticipated to maintain a growth rate of 6.25 percent forever. Assume the stock currently sells for 49.80 per share. REQUIRED:

i. Calculate the dividend yield. [2 marks]

ii. What is the expected capital gains yield? [2 marks]

d. Metallica Bearings Plc is a young start-up company. No dividends will be paid on the stock over the next eight years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of 12.75 per share 9 years from today and will increase the dividend by 5.75 percent per year thereafter. If the required return on this stock is 13.75 percent, what is the current share price? [8 marks]

e. Consider the following table for an eight-year period:

i. Calculate the average return for Treasury bills and the average annual inflation rate for this period. [4 marks]

ii. Calculate the standard deviation of Treasury bill returns over this time period. [6 marks]

iii. Calculate the average real return for Treasury bills. [3 marks]

iv. The stock market reported the average return of 9.6 percent over the same period. What is the average nominal risk premium of the stock market? [2 marks]

f. Describe the efficient market hypothesis and its three forms and discuss the implications of market efficiency for corporate managers. [15 marks]

TOTAL 50 MARKS

\begin{tabular}{ccc} \hline Year & T-bill return & Inflation \\ \hline 1 & 7.44% & 8.56% \\ 2 & 8.79 & 12.19 \\ 3 & 6.02 & 6.79 \\ 4 & 5.82 & 5.01 \\ 5 & 5.60 & 6.55 \\ 6 & 8.39 & 8.87 \\ 7 & 10.71 & 13.14 \\ 8 & 12.85 & 12.37 \\ \hline \end{tabular}