80.2K

Verified Solution

Link Copied!

Portfolio Question

Answer each of the following questions in the space provided below the questions. Mark allocations are noted next to each question. Question 1 (total of 11 marks): Data about a company and the financial markets are given below. All rates are effective annual rates. Assume a classical tax system. The company has 1 million shares. The firm's earnings were $2 million last year and the equity trades at a 15 times price-to-earnings ratio(backward-looking). The beta of the company's equity is 1.25. The company is also funded by 0.5 million 3-year bonds which it just issued. Each has a $100 face value, a 4% pa yield to maturity and a 4% pa coupon rate, paid annually. The corporate tax rate is 30%. 10 year government bonds yield 2% pa and pay coupons of 1% pa. The market risk premium (MRP) is 6% pa. Provide all answers as decimals rounded to at least 6 decimal places. Question 1a (4 marks): Calculate the firm's required return on equity (r). Give your answer as a decimal that's correct to 6 decimal places or more. So for example if your answer is 1.23456789%, you can write 0.0123456789 Answers: 0.07 Question 1b (4 marks): Calculate the firm's debt-to-assets ratio. Give your answer as a decimal that's correct to 6 decimal places or more. So for example if your answer is 1.23456789%, you can write 0.0123456789 Answers: Question 1c (3 marks): Calculate the company's after-tax WACC. Give your answer as a decimal that's correct to 6 decimal places or more. So for example if your answer is 1.23456789%, you can write 0.0123456789. Answers: Please answer all parts of the

Answer & Explanation Solved by verified expert

See Answer