Suppose that the shares of the company Cementos Cordillera are selling today for $35,000, investors expect a dividend of $1,400 the first year and hope to be able to sell a share within a year for $37,800, then:

1. How much is the expected profitability?

2.From the previous point, distinguish which corresponds to dividends and which corresponds to capital gains.

3.What is the share price of Cementos Cordillera?

b)Suppose that there are no taxes and that a company is initially financed only with its own capital. Under these conditions its beta is 0.75. Also, assume that the risk-free return is 1.5% and the market risk premium is 8.6%.

Under these assumptions:

B1. Calculate the beta of the company's assets and the company's profitability expected by shareholders.

Now, suppose the company issues debt, considered riskless by investors. With debt, the company's debt ratio reaches 10%. Under these new assumptions, it is requested:

B2. What is the beta and expected return on the debt?

B3.What should be the new beta of equity and the profitability expected by shareholders?

c) The Nuevo Mundo company presents the following information:

P=$400 million; n = 9,000,000 shares; Kd= 4%; B=$800 million (risk-free debt); (E(Rm) - rf) = 6%; Bp = 1.05 (no debt); Tc = 20%;

The finance manager wants to issue shares in the amount of $200 million to buy back debt in order to improve the company's financial structure. Determine the number of shares issued.

d) Suppose a bond maturing in 8 years issued by Almacenes Sirap SA, which has a face value of US$500 million and a coupon rate of 6% per year. The coupons are paid annually and the principal is paid at the maturity of the bond:

D1.Calculate the price of the bond at the time of issuance, if the return required for this type of instrument is 6.5% per year.

D2.If the bond is traded in the market at 91% of its par value, what is the profitability of the bond issued by Almacenes Sirap SA?

iii.Suppose that you sell the bond at the beginning of year 5, a period in which the rate of return required for a bond of these characteristics is 5% per year. What would be the return on your investment?

Answer rating: 100% (QA)

a Expected profitability The expected profitability can be calculated using the formula for total return Expected profitability Dividend Expected capital gain Initial share price Dividend 1400 Expecte... View the full answer