Question Three ROUBAIX INC is a large multinational conglomerate operating predominantly in the USA, the UK, and Hong Kong. They have both ordinary and preference shares listed on each of the major stock exchanges. That is, the S&P500, the FTSE All Share, and the Hang Seng Indexes. ROUBAIX INC's financial statements for 2020 report earnings of $170m, 155m and HK$123m in the US, UK, and Hong Kong respectively. ROUBAIX INC has 45m class A ordinary shares outstanding on the S&P500 has just paid total dividends on these stocks of $281m. This dividend payment is anticipated to remain constant for the next 7 years and then there will be no dividend payment from year 8 onward. The required rate of return demanded by investors in the US market is 7.50%. ROUBAIX INC has 12.5m class A ordinary shares outstanding on the FTSE All Share has just paid a dividend of 1.00 per share, dividend growth is expected to be 4% per annum over the next 5 years. From year 6 onwards, dividend growth will change to 6% per annum indefinitely. The required rate of return demanded by investors in the UK market is 10%. ROUBAIX INC has 18m ordinary shares outstanding on the Hang Seng is expected to pay a dividend next period of HK$6.50 with dividends growing at 5% per annum for the next 8 years. Thereafter, there will be no dividend payments and the cost of capital on this market is 12%. Preference shares issued on these markets each have a notional value of 1 unit of currency. The dividend rates on stocks listed on the US, UK, and Hong Kong exchanges are 10%, 9% and 12% respectively. The required rate of return for preference shares are 3%, 4% and 4.50% on the US, UK and Hong Kong stock exchanges respectively. Required: a) For each stock market, calculate the price of ROUBAIX INC's ordinary shares, the price of preference shares, and their price-to-earnings ratios. [60 marks] b) Provide an interpretation of the price-to-earnings ratio and comment on these ratios for ROUBAIX's stocks listed on each exchange. [10 marks] c) Calculate the price of a 6-month at-the-money call and put option for ROUBAIX's UK stock. The annualised volatility of the stock is 25% per annum, and the risk- free rate is 0.65% per annum. Note: you may ignore dividend payments in your calculation. [30 marks) Question Three ROUBAIX INC is a large multinational conglomerate operating predominantly in the USA, the UK, and Hong Kong. They have both ordinary and preference shares listed on each of the major stock exchanges. That is, the S&P500, the FTSE All Share, and the Hang Seng Indexes. ROUBAIX INC's financial statements for 2020 report earnings of $170m, 155m and HK$123m in the US, UK, and Hong Kong respectively. ROUBAIX INC has 45m class A ordinary shares outstanding on the S&P500 has just paid total dividends on these stocks of $281m. This dividend payment is anticipated to remain constant for the next 7 years and then there will be no dividend payment from year 8 onward. The required rate of return demanded by investors in the US market is 7.50%. ROUBAIX INC has 12.5m class A ordinary shares outstanding on the FTSE All Share has just paid a dividend of 1.00 per share, dividend growth is expected to be 4% per annum over the next 5 years. From year 6 onwards, dividend growth will change to 6% per annum indefinitely. The required rate of return demanded by investors in the UK market is 10%. ROUBAIX INC has 18m ordinary shares outstanding on the Hang Seng is expected to pay a dividend next period of HK$6.50 with dividends growing at 5% per annum for the next 8 years. Thereafter, there will be no dividend payments and the cost of capital on this market is 12%. Preference shares issued on these markets each have a notional value of 1 unit of currency. The dividend rates on stocks listed on the US, UK, and Hong Kong exchanges are 10%, 9% and 12% respectively. The required rate of return for preference shares are 3%, 4% and 4.50% on the US, UK and Hong Kong stock exchanges respectively. Required: a) For each stock market, calculate the price of ROUBAIX INC's ordinary shares, the price of preference shares, and their price-to-earnings ratios. [60 marks] b) Provide an interpretation of the price-to-earnings ratio and comment on these ratios for ROUBAIX's stocks listed on each exchange. [10 marks] c) Calculate the price of a 6-month at-the-money call and put option for ROUBAIX's UK stock. The annualised volatility of the stock is 25% per annum, and the risk- free rate is 0.65% per annum. Note: you may ignore dividend payments in your calculation. [30 marks)
