SkyTech Ltd. is expected to pay a per-share dividend next year of $30. The market’s consensus is that the firm’s dividend growth rate of 2% per year will be maintained in the foreseeable future. SkyTech’s cost of equity is 10% per year.

(a) What is the price of a share of SkyTech?                                

(b) Suppose SkyTech’s internal view is that it has an expected average yearly dividend growth of 2% because its return on equity is 8% and management retains 25% of earnings. What is the earnings per share of SkyTech next year? What is the present value of growth opportunities per share of SkyTech?                                                 

(c)    Suppose SkyTech is about to announce that it will increase its retention ratio to 50%, effective immediately. If the market is still unaware of SkyTech’s decision, what will be the new value of the stock after the change in policy? How would you invest to profit from this fact?                                                            

(d)    If the dividend policy of SkyTech Ltd. has not shown a clear relationship to its earnings growth, what other absolute valuation model can you use to value the company? What cash flows should be used in the valuation?                          

Are the following statements true or false? Briefly explain your answers.

a)    If the ROE of a company is higher than its discount rate r, it would be in shareholders’      interest to retain earnings in the company.                                      

        (b)    “Duration is a good measure of interest rate risk if change in yield is small and rates change    in a parallel fashion. Satisfying these two assumptions imply that two portfolios with the        same duration will react in exactly the same way to a given change in yield.” True or false?    Briefly explain your answer.  

1. A stock records the following returns over the last 6 months.

1. What are the arithmetic returns for the stocks?
2. What are the geometric returns for the stocks?
3. What are the variances for the stocks?
4. What are the standard deviations for the stocks?
5. Compute the coefficient of variation of stocks.
6. Which stock would you choose? Why?

Are the following statements true or false? Briefly explain your answers. [Hint: State your        conclusion and then briefly explain (preferably in no more than a few lines).]

        (a)   If a firm announces an unexpectedly large cash dividend, the EMH would predict a gradual price change to occur for several weeks after the announcement.

       (b)   If the ROE of a company is higher than its discount rate r, it would be in shareholders’ interest to retain earnings in the company.                                    

       (c)   “Duration is a good measure of interest rate risk if change in yield is small and rates change     in a parallel fashion. Satisfying these two assumptions imply that two portfolios with the    same duration will react in exactly the same way to a given change in yield.” True or false?         Briefly explain your answer.                                  

Erin currently has $44,000 in an account. She will deposit $10,000 every other year beginning next year and ending nine years from today. She will have $_____ in her account 10 years from today. Assume the account pays 5% per annum.

What is a currency crisis and how does it affect the banking system? In what ways do banking crisis crisis speak currency crisis?

JQ Investor has 9,000 of DuPont currently valued at $56. He sets up a collar at $49 with a premium of $2.92, and $63 with a premium of $4.61. When the collar expires the stock is trading at $58.80

JQ buys _______ puts

and writes _______ calls.

The impact to the portfolio of this collar at the time it is put in place is $__________

The value of the portfolio at the close on the day the collar expires is $__________

Correct answers:

90 puts, 57 calls, -3.00, 529,127.00

Please tell me how to get to these solutions. Thank you!

LRCX currently pays $5 in dividend. You think the company can growth dividend at 20% for the next 5 years. From year 6 on, the company can growth dividend at 10% a year. The beta for LRCX is 1.2 and the market risk premium is 8%, with risk free rate of 2.5%. What should be the price of LRCX today according to dividend discount model?

GOOG has bet of 1.2 and AAPL has beta of 0.9. The market risk premium is 8% and the risk free rate is 3%. You estimated that GOOG's stock price will growth to $1210 a share next year, from the current level of $1080. You also estimated that AAPL stock price will be $260 next year, where it is $230 currently. GOOG pays no dividend and AAPL will pay $5 in dividend next year. Should you buy/short either of these stocks?

Most all companies have a target or optimal capital structure that they try to maintain. Which of the following describes an "optimal" capital structure? (Note: capital structure is the proportion of money raised from common stock and the proportion raised from debt).

A) The one with the highest cost of debt and the lowest cost of equity.

B) The one that takes the biggest advantage of the tax deductibility of debt by borrowing 100% of the funds required for investment.

C) The capital structure that always borrows half the funds and issues new equity for the other half.

D) The capital structure that results in the lowest cost of obtaining funds; the one with the lowest Weighted Average Cost of Capital (WACC).

E) None of the other answers is correct.

Hedge Funds:  What key characteristics and regulatory constraints distinguish Hedge Funds from other types of Mutual Funds?

1. You have purchased a put option on Pfizer common stock. The option has an exercise price of $27 and Pfizer stock currently trades at $29. The option premium is $0.50 per contract.

1. What is the intrinsic value of the option?
2. What is the time value of the option?
3. What is your net profit on the option if Pfizer’s stock price does not change over the life of the option?
4. What is your net profit on the option if Pfizer’s stock price falls to $23 and you exercise the option?

An asset used in a 4-year project falls in the 5-year MACRS class (refer to MACRS table on page 277), for tax purposes. The asset has an acquisition cost of $15,535,460 and will be sold for $5,328,631 at the end of the project. If the tax rate is 0.39, what is the aftertax salvage value of the asset (SVNOT)?