Use the below information to value the debt in a levered company with annual perpetual cash flows from assets that grow. The next cash flow will be generated in one year from now.

Data on a Levered Firm with Perpetual Cash Flows

Item abbreviation	Value	Item full name
FFCF (millions)	$30.5	Firm free cash flow (or Cash Flow from Assets)
g	2% pa	Growth rate of OFCF
rD	3% pa	Cost of debt
rEL	6% pa	Cost of levered equity
D/VL	35% pa	Debt to assets ratio, where the asset value includes tax shields
tc	30%	Corporate tax rate

The current value of debt is

a.1157.5

b.361.86

c.405.12

d.446.63

e.672.03

A stock pays annual dividends. It just paid a dividend of $6. The growth rate in the dividend is 2% pa. You estimate that the stock's required return is 10% 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 share price at time t=0 is $75.00

c.The dividend at time t=3 will be $6.3672

d.Total return of the stock is equal to the dividend yield plus the capital return.

e.The long-term capital return of the stock is 2%

You discover an investment costing $3,000 which has an expected total return of 15% pa, but a required return of only 11% pa. Of the 15% pa total expected return, the capital return is expected to be 8% pa. Assume that the required return of 11% remains constant, the dividends can only be re-invested at 11% pa and all returns are given as effective annual rates.

Which of the following statements is NOT correct?

a.When plotted on the Security Market Line, the investment would have a positive alpha.

b.You would use a discount rate of 11% to find the NPV of this investment

cThe expected dividend return is 7%

d.The investments price at time t=20 would be $49,099.61

e.The investment is currently under-priced