After your victory in the Financial Markets inter-university tournament last month, you are ready to enter...

   

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After your victory in the Financial Markets inter-university tournament last month, you are ready to enter the financial scene. You join a group of other SUSS students to compete against the best teams from all over Asia. This time, the competition will have only two rounds. The first round is on equity markets. Get ready! Mark! Go! Assume you are the founding team of a reusable rocket business seeking to raise funds for the first time. Your firm currently has $10 million. You need $20 million more for the launch pad and the booster. Your technology rocks. You are confident you can recycle rockets 10 times and refurbish them in record times. This ambitious plan translates into an annual return on equity of 200% after a planned break-even point in two years. You want to maximise your future wealth after years of research and development. Investors approach you to inject cash into your business in the form of puttable, preferred, participating shares. The offered conditions are a put value of 98 cents to the dollar, a preferred dividend fixed rate of 5%, and a participating dividend equal to 50% of the extra profit above an annual return on equity of 30%. (a) Examine, in less than 200 words, whether the offer is attractive. (10 marks) An investment banker wants to IPO your business on the SGX. She claims that it could enter the Singapore Straits Index-30 (STI) after a few years. You know that the STI is a float- adjusted, market cap-weighted index, of course. (b) Illustrate the main impact among STI constituents if the index was computed on a price- weighted and an equal-weighted methodology. (15 marks) Assume your stock would initially be priced at $480. A typical investor would post an initial margin requirement is 70%, with a maintenance margin set at 40%. (c) Compute and appraise the price at which the stock investor will get a margin call. (5 marks) A fund bought your stock at $520 two weeks after the IPO. The stock buyer put a 60% margin. One month later, the investor sells the stock for $830. Consider a $25 transaction cost on the purchase and sale of the stock. The investor paid $5 on the call rate and received no dividend. (d) Determine the transaction's leverage ratio, net dollar gain, and equity return. (10 marks) Finally, assume three alternative scenarios to the base case above in Question 1(d): Scenario (A)-borrowing limit at 50% of the position, no change in the interest paid, the share price one month later is $300, and the investor decides to sell the stock. Scenario (B)-borrowing limit at 20% of the position, no change in the interest paid, the share price one month later is $825, and the investor decides to sell the stock. Scenario (C)-borrowing limit at 80% of the position, no change in the interest paid, the share price one month later is $700, and the investor does not sell the stock. (e) Determine the highest return scenario and discuss the impact of leverage. on returns. (10 marks) After your victory in the Financial Markets inter-university tournament last month, you are ready to enter the financial scene. You join a group of other SUSS students to compete against the best teams from all over Asia. This time, the competition will have only two rounds. The first round is on equity markets. Get ready! Mark! Go! Assume you are the founding team of a reusable rocket business seeking to raise funds for the first time. Your firm currently has $10 million. You need $20 million more for the launch pad and the booster. Your technology rocks. You are confident you can recycle rockets 10 times and refurbish them in record times. This ambitious plan translates into an annual return on equity of 200% after a planned break-even point in two years. You want to maximise your future wealth after years of research and development. Investors approach you to inject cash into your business in the form of puttable, preferred, participating shares. The offered conditions are a put value of 98 cents to the dollar, a preferred dividend fixed rate of 5%, and a participating dividend equal to 50% of the extra profit above an annual return on equity of 30%. (a) Examine, in less than 200 words, whether the offer is attractive. (10 marks) An investment banker wants to IPO your business on the SGX. She claims that it could enter the Singapore Straits Index-30 (STI) after a few years. You know that the STI is a float- adjusted, market cap-weighted index, of course. (b) Illustrate the main impact among STI constituents if the index was computed on a price- weighted and an equal-weighted methodology. (15 marks) Assume your stock would initially be priced at $480. A typical investor would post an initial margin requirement is 70%, with a maintenance margin set at 40%. (c) Compute and appraise the price at which the stock investor will get a margin call. (5 marks) A fund bought your stock at $520 two weeks after the IPO. The stock buyer put a 60% margin. One month later, the investor sells the stock for $830. Consider a $25 transaction cost on the purchase and sale of the stock. The investor paid $5 on the call rate and received no dividend. (d) Determine the transaction's leverage ratio, net dollar gain, and equity return. (10 marks) Finally, assume three alternative scenarios to the base case above in Question 1(d): Scenario (A)-borrowing limit at 50% of the position, no change in the interest paid, the share price one month later is $300, and the investor decides to sell the stock. Scenario (B)-borrowing limit at 20% of the position, no change in the interest paid, the share price one month later is $825, and the investor decides to sell the stock. Scenario (C)-borrowing limit at 80% of the position, no change in the interest paid, the share price one month later is $700, and the investor does not sell the stock. (e) Determine the highest return scenario and discuss the impact of leverage. on returns. (10 marks)

Answer rating: 100% (QA)

a To assess whether the offer is attractive we need to evaluate the terms of the puttable preferred participating shares 1 Put Value The put value of 98 cents to the dollar means that investors have t... View the full answer