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1.

In the last decade there has been a shift towards the direct transfer of funds from investors to
the corporate sector. Examine some of the reasons for this trend.300 words
2. (Annuity Payment and term loan) On 31 December Liz Klemkosky bought a yacht for
S50000,paying a deposit $10000 and agreeing to pay the balance in 10 equal annual
instalments that wouldinclude both the principal and 10% interest. How big would the
annual payments be?300 words
3. What is the efficient markets hypothesis? Explain this concept in your own words.300
words
4. Some practicing financial analysts focus on earnings per share (EPS) as a major
determinantthe firm's share price.300 words
a. Explain the link between EPS and the share price.
b. What are the limitations of this approach to share valuation?
5. (Bond Valuation) You own a bond with a par value of $1000 that pays a $100 annual
coupon.The bond matures in 15 years. Your required rate of return is 12% p.a.400
words(involves calculation)
a. Calculate the value of the bond.
b. How does the value of the bond change if your required rate of return (i) increases
to15% p.a., or (ii) decreases to 8% p.a.?
c. Assume that the bond matures in 5 years instead of 15 years. Recompute your
answers inpart (b).
6. What causes the time-disparity ranking problem? How should capital-budgeting decisions
bemade in the presence of the time-disparity problem?300 words

7. 300 words

Investment

Investment Cost

Rate of Return

200000

18

125000

16

150000

12

275000

10

The latest balance sheet for the company shows:


Long term debt
Bonds: Par $100, annual coupon 16.35%, 5
years to maturity
Equity
Preference shares (55000 shares outstanding, 94
cents dividend}
Ordinary shares (825000 shares issued)
Total

$
1,500,000
550,000
1,650,000
3,700,000

The company's bank has advised that the interest rate on any new debt finance provided for the
projects would be 8% p.a.
The company's preference shares currently sell for $9.09, and to induce investors to take
up a new offering of preference shares the company would have to set the issue price at a
discount of 4% off the present market price.
The company's existing shares sell for $3.03 each and management has disclosed that it
expects to pay a dividend of 16 cents at the end of the next year. Historically, dividends have
increased at an annual rate of 9% p.a. and are expected to continue to do so in the future. The
ordinary equity component to finance new projects will require new shares to be sold at a 10%
discount from the current $3.03 price,and the costs for undertaking the new issue are estimated
to be 30 cents per share. The company taxrate is 30%.

(a)

Determine the market value proportions of debt, preference shares and ordinary equity

comprisingthe Companys capital structure.


(b)

Calculate the after-tax costs of finance for each source of finance.

(c)

Determine the after-tax weighted average cost of finance for the company.

(d)

Determine which investments should be made.

8. (Costof a term loan) Temple Freight Forwarding Company needs $300000 to finance the
construction of several prefabricated metal warehouses. The firma that manufactures the
warehouses has offered to finance the purchase with a $50000 down-payment followed by
five annual instalments of $69000 each. Alternatively, Temple's bank has offered to lend the
firm $300000 to be repaid in 10 half- yearly instalments based on a nominal annual rate of
interest of 16%. Finally, the firm could finance the needed $300000 through a loan from a
finance broker requiring a single lump-sum payment of $425000 in five years.500
words(complex and lengthy question, also involvescalculation)
a. What is the effective annual rate of interest on the loan from the warehouse
manufacturer?
b. What will the annual payments on the bank loan be?
c. What is the annual rate of interest for the term loan from the finance broker?
d. Based on cost considerations only, which source of financing should Temple
select?