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Question 04:

Use the following information to value a firms assets.

Assume the following:

• the market value of the firm's assets is expected to remain constant over time so the firm doesn't grow and can be valued as a level perpetuity,

• the firm has a constant debt-to-assets ratio,

• the bonds are priced at par, and

• the stock's expected capital returns are zero.

Relevant data:

• The number of shares on issue is 1 million and the number of bonds is 800,000

• The constant annual dividend per share is $3

• The bonds have an annual fixed coupon payment of $2.50

• 10-year government bonds have a yield of 2% and the market risk premium is 5%

• The beta of levered equity is 1.2

• The beta of the bonds is 0.9

Which of the following is the market value of the levered firms assets?

a. $70.1 million

b. $68.3 million

c. $21.2 million

d. $42.9 million

e. $54.7 million

Question 02:

A stock pays annual dividends. It just paid a dividend of $2. The growth rate in the dividend is 3% pa. You estimate that the stock's required return is 9% pa. Both the discount rate and growth rate are given as effective annual rates.

Which of the following statements is NOT correct?

a. Total return of the stock is equal to the company's long term cost of equity.

b. The capital return of the stock is 3%

c. The dividend at time t=3 will be $2.185

d. The share price at time t=0 is $34.33

e. Dividend growth rate is equal to the long-term expected dividend yield.