Question Three VANNIC 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. VANNIC INC's financial statements for 2020 report earnings of $268m, 100m and HK$125m in the US, UK, and Hong Kong respectively. VANNIC INC has 50m class A ordinary shares outstanding on the S&P500 has just paid total dividends on these stocks of $250m. This dividend payment is anticipated to remain constant for the next 4 years and then there will be no dividend payment from year 5 onward. The required rate of return demanded by investors in the US market is 6%. VANNIC INC has 15m 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 6% per annum over the next 5 years. From year 6 onwards, dividend growth will change to 8% per annum indefinitely. The required rate of return demanded by investors in the UK market is 12%. VANNIC INC has 12m ordinary shares outstanding on the Hang Seng is expected to pay a dividend next period of HK$12.50 with dividends growing at 4% per annum for the next 4 years. Thereafter, there will be no dividend payments and the cost of capital on this market is 10%. 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 VANNIC INC's ordinary shares, the price of preference shares, and their price-to-earnings ratios. [60 marks] b) In the US, the market portfolio is well approximated by 4 sectoral index returns, with the following information. OM Sector ENGY FINC MANU MATR 100 110 200 90 Weight 0.25 0.25 0.35 0.15 i) ii) iii) What is the standard deviation of the US market portfolio return and the sectoral index betas? Specify the Capital Market Line if E(RM) = 5.40% and Rp = 0.75%. Provide an Interpretation of the Capital Market Line and distinguish it from the Security Market Line. [40 marks] Question Three VANNIC 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. VANNIC INC's financial statements for 2020 report earnings of $268m, 100m and HK$125m in the US, UK, and Hong Kong respectively. VANNIC INC has 50m class A ordinary shares outstanding on the S&P500 has just paid total dividends on these stocks of $250m. This dividend payment is anticipated to remain constant for the next 4 years and then there will be no dividend payment from year 5 onward. The required rate of return demanded by investors in the US market is 6%. VANNIC INC has 15m 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 6% per annum over the next 5 years. From year 6 onwards, dividend growth will change to 8% per annum indefinitely. The required rate of return demanded by investors in the UK market is 12%. VANNIC INC has 12m ordinary shares outstanding on the Hang Seng is expected to pay a dividend next period of HK$12.50 with dividends growing at 4% per annum for the next 4 years. Thereafter, there will be no dividend payments and the cost of capital on this market is 10%. 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 VANNIC INC's ordinary shares, the price of preference shares, and their price-to-earnings ratios. [60 marks] b) In the US, the market portfolio is well approximated by 4 sectoral index returns, with the following information. OM Sector ENGY FINC MANU MATR 100 110 200 90 Weight 0.25 0.25 0.35 0.15 i) ii) iii) What is the standard deviation of the US market portfolio return and the sectoral index betas? Specify the Capital Market Line if E(RM) = 5.40% and Rp = 0.75%. Provide an Interpretation of the Capital Market Line and distinguish it from the Security Market Line. [40 marks]
