Question Pop Quiz

RISK AND RETURN

1.  Banin Auto Supplies is examining the following probability distribution. What is the coefficient variation? Cash flow (RM) Probability 20 0.30 40 0.40 60 0.30	Notes : Noraidah awang 1.     Expected rate 2.     Std deviation 3.     Coefficient variation (correct)
2. The Popular Co. common shares have an expected return of 25% and a coefficient of variation of 2.0. What is the variance of Popular Co. common share returns?	Notes : Chen Kiaw Hui (correct)

 BONDS

1. Myra Industries bond has a 10% coupon rate. Interest is paid semiannually, and the bond has 20 years to maturity. If investors require a 12% yield, what is the bond’s value? What is the effective annual yield on the bond?	Notes : Priscilla (correct) Bond Value = $849.30 EAR = 12.36%
2. Shafrry Corp. bond carries an 8% coupon, paid semiannually. The par value is RM1,000, and the bond matures in 6 years. If the bond currently sells for RM911.37, what is its yield to maturity? What is the effective annual yield?	Notes : Kamariah nor YTM = 5% EAR = ( 1+0.05) 2  - 1 = 10.25%

 STOCKS

1. Sky Co. has just paid a cash dividend of $2 per share. Investors require a 16% return from investments such as this. If the dividend is expected to grow at a steady 8% per year, what is the current value of the stock? What will the stock be worth in five years?	Notes Ong peai sin Constant growth model (correct)
2. In problem 1, what would the stock sell for today if the dividend was expected to grow at 20% per year for the next three years and then settle down at 8% per year indefinitely?	We have supernormal growth for the next 3 years. (1) first calculate the expected dividend, (2) expected stock price, (3) the present value of  stock price

COST OF CAPITAL

1. Suppose stock in Liam’s Corporation has a beta of 0.80. The market risk premium is 6%, and the risk free rate is 6%. Liam’s last dividend was $1.20 per share, and the dividend is expected to grow at 8% indefinitely. The stock currently sells for $45 per share. What is Liam’s cost of equity capital?

Notes : Connielia Thomas (correct) re = 10.88%

2. Assume the following capital structure for the Mega Corp. Debt 35% (wd) Preferred stock 15% (wp) Common equity 50% (we) The following facts are also provided : bond yield to maturity ……………..…9% (rd) Corporate tax rate……………………35%(T) Dividend, preferred stock…………..$8.50 (D) Price, preffered stock ……………....$100 (P) Floatation cost, preferred stock……….$2 (F) Dividend, common stock ………….$1.20 (D) Price, common stock…………………$30 (P) Growth rate, common stock………….9%  (g) Compute the weighted average cost of capital. Answer : Structure Weighted Cost of element Weighted cost Debt 35% 5.85 2.05% p/s 15 8.67 1.30 c/s 50 13 6.50 WACC 9.85%

Notes : Khodijah Sunardi Cost of debt Rd = 9% ( 1- 0.35) Rd = 5.85% Cost of p/s Rp = D/P –F Rp = 8.50 / 100 - 2 Rp = 8.67% Cost of c/s Re = 13%