QUESTION 1:

a. Compare and contrast hedging, speculation and arbitrage. (6 marks) b. Aforward contract calls for delivery of one Sigma stock 6 months from now. The current market price of one Sigma stock is 40. The price of the forward contract is 45, and the risk-free rate is 4% per annum. The stock is not paying any dividends. Design an arbitrage transaction using one contract. Make sure you list all the steps and the associated cash flows. (8 marks) c. Imagine you are managing a copper mine and plan to sell 700 metric tons of copper 3 months from today. Since you do not know the future price of copper, you are considering employing a put protection strategy to manage your price risk. A put option giving you the right to sell 1 metric ton of copper for $6.00 per kilogram 3 months from now costs $320. This is the option you want to use. State the net cash position with and without the put protection if the spot price of copper in 3 months' time turned out to be: i. $5.30 ii. $6.607 Explain and show your workings. (11 marks) Note: 1 metric ton = 1,000 kgs Define the agency problem and illustrate for what reasons (if any) it might arise in each of the following types of business: sole proprietorships general partnerships private limited companies public limited companies Question 3 (25 marks) I:I You must answer all parts of this question. a. Ahmed is one of the major bondholders of GoldenOil Plc, owning 30% of the total bonds issued by the company. He is not happy with how the company's bonds have performed over the last three years, and he is planning to make his voice heard during the next round of voting. Do you think he will be able to do so? Justify your answer. (2 marks) b. Explain the concept of time value of money. (6 marks) c. Amelia has inherited the family business and has decided to sell it. In exchange for her family business, Amelia has been offered an immediate payment (today, Year 0) of 350,000, with further payments of 500,000 at the end of the first year, 500,000 at the end of the second year, and 750,000 at the end of the third year. The discount rate (or the opportunity cost for an investment of this type) is 3%. I. Suppose a second buyer approaches Amelia and offers her 1,765,000 today for the business. Should Amelia accept the second buyer's offer or accept the original offer of 350,000 and the series of payments aver three years? (13 marks) ii. Briefly discuss what other issues should Amelia consider in deciding whether to accept the first or second offer. Question 4 (25 marks) D You must answer all parts of this question. Vesta Ltd has outgrown its current site due to the demand for electric cars. A decision has already been made that the company wishes to expand in line with demand and has found two sites that would be suitable for their expansion plans, Site A and Site B. At the moment, both sites would need a considerable investment to ensure they are able to provide all of the requirements for their customers. The following table summarises the initial investment required, as well as the net cash inflows for years 1-5. Project Net Cash Flows () Year Site A Site B 0 (750,000) (600,000) 1 195,000 220,000 2 195,000 160,000 3 295,000 170,000 4 295,000 180,000 5 295,000 205,000 In line with the company's policy, the company applies a straight-line method of depreciation. The company's cost of capital is 15%. a. Calculate the net present value (NPV) and internal rate of return (IRR) of the proposed two sites. You are required to show all your workings to support your answers. Note: Use the interpolation model to work out the IRRs for both sites, basing your calculations on the discount rates of 15% and 20%. Thereafter, use the IRR Excel formula to confirm that your IRR calculations are reasonably accurate. (12 marks) b. Which site should Vesta Ltd invest in? Why? (4 marks) c. IRR is a popular investment appraisal technique. Discuss the advantages and disadvantages of this method. (9 marks) The suggested word limit for this question is 400 words. The word limit only applies to parts (b) and (c). Great Wall Plc has made the following dividend payments to its shareholders: Date 5 years ago 4 years ago J years ago 2 years ago Last year This year Dividend per share 5.00 5.16 5.40 5.50 5.65 5.80 The cost of equity (Rg) for Great Wall Plc is 9.2%. a. Based on the table given above, calculate the historical growth rate in dividends. Figures should be rounded to four decimal places. (4 marks) b. Using the Gordon growth formula, compute the fundamental value of Great Wall Plc. In doing so, assume that the perpetual growth rate in dividends will be equal to the historical growth rate. Figures should be rounded to four decimal places. (5 marks) c. Perform sensitivity analysis by varying the growth rate calculated in point (a) up and down by one percentage point. Figures should be rounded to four decimal places. (8 marks) d. Could dividend pricing models be used for companies that are currently not paying dividends? Explain your answer. (8 marks)