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1.Peter is considering investing R100 000 in the following 2 shares: Share B (Beta) % Invested Required Return 9% 11% Market Risk Premium 6% 6% A B 0.8 1.1 30% 70% • The risk-free rate is 7%. Required: 1.1 Use the CAPM and find the market return. (2) 1.2 Use the CAPM and find the required return for the portfolio. (2) 1.3 Calculate the portfolio's beta. (1) 1.4 Graphically illustrate the individual security market lines for shares A and B.
2.The five-year bond yields 6.4% and has a coupon of 8.5%. If this yield to maturity remains unchanged, what will be its price one year hence? Assume annual coupon payments and a face value of $100. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. What is the total return to an investor who held the bond over this year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
3.HHQ1 LLC has projected a net income of $1 million USD in 2020. HHQ1 pays $100,000 total dividends to its 100,000 common shareholders outstanding @ the end of 2019 (Jan 01: 80,000 shares outstanding; July 01: 20,000 new shares were issued). The company also has 10,000 convertible preferred stocks ($5 dividend per P.S) and 2000 convertible bonds (10% coupon rate @$1000 par value). In 2020, 80% of the preferred stock holders may convert to common stocks (3 Common shares per preferred share). Also, 100% bondholders are allowed to convert to 2 common shares per bond. Tax rate 40%. Calculate both the basic and diluted EPS for HHQ1.
4.Suppose the current price of gold is $1,440 an ounce. Hotshot Consultants advises you that gold prices will increase at an average rate of 14% for the next two years. After that the growth rate will fall to a long-run trend of 3% per year. Assume that gold prices have a beta of 0 and that the risk-free rate is 6%.
What is the present value of 1.2 million ounces of gold produced in 10 years? WRITE YOUR ANSWER IN BILLION PLEASE.
The answer is not 1.59billion or .98billion.
Expert Solution
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3.
| No.of shares | O/s for (days) | No.*Days | |
| 80000 | 181 | 14480000 | |
| 100000 | 184 | 18400000 | |
| 32880000 | |||
| Wted.. | No.of shs. | 90082.19 | 32880000/365 |
| Basic Earnings per share=( Net income-Dividend on preferred stocks)/Wt. av. No.of common shares o/s |
| Earnings available to common shares=1000000-(10000*5)= 950000 |
| Wt. av. no. common shares o/s= 90082.19 |
| So, Basic EPS= 950000/90082.19= |
| 10.55 |
| Diluted EPS=Net income+After-tax cost of bond interest/Wt. av. No.of common shares o/s+Diluted Shares) |
| Net income-Preferred dividends (20%,not convertible)+After-tax cost of bond interest=1000000-(10000*20%*5)+(2000*1000*10%*(1-40%))= |
| 1110000 |
| Wt. av. no. common shares o/s= 90082.19 |
| Preferred stock conversions possible= 10000*80%*3=24000 shares |
| Bond conversions possible= 2000*2= 4000 |
| so, Diluted EPS=1110000/(90082+24000+4000)= |
| 9.40 |
Tabulating the above,
| Basic EPS | Diluted EPS | ||
| Net income | 1000000 | 1000000 | |
| Less: Preferred Dividend | 50000 | 10000 | |
| Add: After-tax cost of interest | 0 | 120000 | |
| Numerator | 950000 | 1110000 | |
| Wt.average no. of common shares outstanding | 90082 | 90082 | |
| Additional no.of shares --if preferred shares are converted | 0 | 24000 | 10000*80%*3 |
| Additional no.of shares --if bonds are converted | 0 | 4,000 | 2000*2 |
| Total no.of Basic/diluted shares----Denominator | 90082 | 118082 | |
| Basic/Diluted EPS----- (Numerator/denominator) | 10.55 | 9.40 |
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