Question 2 (Cost of capital)

Sankara Ltd's current share price is $20 and it has just paid $1 dividend. As Sankara Ltd is a

matured company, this $1 dividend is expecte dto grow at a rate of 3% per year.

Part A

What is the expected return of the shareholders of Sankara Ltd?

Part B

Sankara Ltd has preference share outstanding that pays a fixed dividend of $2 per share. If

the stock is currently priced at $25 per share, what is the expected return of the preference

shareholders?

Part C

Sankara Ltd has just issued a 6-year bond with a coup[on rate of 10%. The price receive by Sankara Ltd was $1,200. What is Sankara Ltd's pre-tax cost of debt?

Part D

Sankara Ltd has 5 million ordinary shares outstanding and 1 million preference shares outstanding, and its equity has a total book value of $50 million. Its liabilities has a total

book value of $20 million. If Sankara Ltd's ordianry and preference share are priced as in Part A and B, what is the market value of the company's assets?

Part E

If the tax rate faced by Sankara Ltd is 30% and given the information in Part A-D, what is Sankara Ltd's WACC?

Question 3 (Risk Management-Theory)

Part A

Identify and explain the 3 reasons why hedging with commodity future are better alternative to long term supply contracts.

Part B

Can hedging lead to losses? Explain.