Acc/531 Week 3
1. Refer to the following information: Stock | E(r) | | Correlation Coefficients | 1 | 0.06 | 0.20 | 1 with 2: -0.10 | 2 | 0.08 | 0.10 | 1 with 3: +0.60 | 3 | 0.15 | 0.15 | 2 with 3: +0.05 |
A portfolio is formed as follows: sell short $1,000 of Stock 1; buy $1,500 of Stock 2; buy $1,500 of Stock 3. The investor uses $1,000 of his own equity, with the remaining amount borrowed at a risk-free interest rate of 4% (with continuous compounding). (a) Assuming that there are no restrictions on the use of short-sale proceeds, what is this investors expected rate of return? (b) What are some of the issues associated with short-selling, and what impact could these issues have on the expected return calculated in part (a). …show more content…
Briefly explain why shares in a levered company may be considered as a call option on the assets and the implications that this has for capital structure.
ANSWER
7. Two corporations A and B have exactly the same risk and both have a current stock price of $100. Corporation A pays no dividend and will have a price of $120 one year from now. Corporation B pays dividends and will have price of $113 one year from now after paying the dividend. The corporations pay no taxes and investors pay no taxes on capital gains but pay a tax of 30% income tax on dividends. What is the value of the dividend that investors expect corporation B to pay one year from today?
ANSWER
8. The government revises(MEANS DECREASE) the capital gains tax rate to 5%, which represents a substantial cut in the rate for the vast majority of investors. How would you expect this change to impact on: i) the ex-dividend price movement of shares ii) investor preferences for share repurchases
ANSWER
9. Consider two semi-annual coupon bonds with the following properties: Bond | Maturity | Face Value | Coupon | B1 | 3 years | 100 | 12% | B2 | 3.5 years | 100 | 30.3525% |
The current yield for both bonds is 10%.(ANNUAL
A portfolio is formed as follows: sell short $1,000 of Stock 1; buy $1,500 of Stock 2; buy $1,500 of Stock 3. The investor uses $1,000 of his own equity, with the remaining amount borrowed at a risk-free interest rate of 4% (with continuous compounding). (a) Assuming that there are no restrictions on the use of short-sale proceeds, what is this investors expected rate of return? (b) What are some of the issues associated with short-selling, and what impact could these issues have on the expected return calculated in part (a). …show more content…
Briefly explain why shares in a levered company may be considered as a call option on the assets and the implications that this has for capital structure.
ANSWER
7. Two corporations A and B have exactly the same risk and both have a current stock price of $100. Corporation A pays no dividend and will have a price of $120 one year from now. Corporation B pays dividends and will have price of $113 one year from now after paying the dividend. The corporations pay no taxes and investors pay no taxes on capital gains but pay a tax of 30% income tax on dividends. What is the value of the dividend that investors expect corporation B to pay one year from today?
ANSWER
8. The government revises(MEANS DECREASE) the capital gains tax rate to 5%, which represents a substantial cut in the rate for the vast majority of investors. How would you expect this change to impact on: i) the ex-dividend price movement of shares ii) investor preferences for share repurchases
ANSWER
9. Consider two semi-annual coupon bonds with the following properties: Bond | Maturity | Face Value | Coupon | B1 | 3 years | 100 | 12% | B2 | 3.5 years | 100 | 30.3525% |
The current yield for both bonds is 10%.(ANNUAL