Question

1) CBA arranges financing for Super Duper Pty Ltd with a 90 day bank bill with a face value of $500000. City Investments buy the bill when it is first issued at a yield of 3.25% p.a. and sell it 30 days later to Prudential Investments at a yield of 3.65% pa . What price does City Investments pay for the bill? (a. $496,025.01 b.$484,261.50 c.$495,540.14 d.$498,667.94 e. $500,000.00 )

2) A government bond with a face value of $500,000 was issued eight years ago and there are seven years remaining until maturity. The bond pays semi-annual coupon payments of $22,500, the coupon rate is 9% p.a. paid twice yearly and rates in the marketplace are 9.6% pa compounded semi-annually. What is the value of the bond today?

3)According to the prospectus of New Start Ltd, the company anticipates paying its first dividend of $0.85 in 5 years time, and thereafter expects the dividend to increase by 4% each year indefinitely. If the required return is 15%, what is the current value of a New Start share today?

4) Vanderlay Industries (VI) requires equity financing to fund a special project. They have decided to conduct a renounceable rights issues to raise $5.86 million funding. VI will set the subscription price to the rights issues at $2.20 per share. The current share price is $2.80per share and there are currently 8million shares on issue. How many shares does a VI shareholder need to own to receive one right? (a. 2.8 b. 4 c.8,000,000 d.3 e.5 )

Answer 1

Answer 1)

By using the concept of Compound interest formula

The discounted price = Bill value /( 1+ yield) ^ time

option d is right .

Answer 2)

$ 484,960.34

Face Value Of Bond	$500,000
Coupon Rate	9%
Required Yield	9.6%
Frequency of coupon	Semiannual
	No of coupon	Coupon	PV at 9.6% componded half yearly	PV of Cash Inflow
1	17	$22,500	0.954	$21,469.47
2	18	$22,500	0.910	$20,486.13
3	19	$22,500	0.869	$19,547.84
4	20	$22,500	0.829	$18,652.51
5	21	$22,500	0.791	$17,798.20
6	22	$22,500	0.755	$16,983.02
7	23	$22,500	0.720	$16,205.17
8	24	$22,500	0.687	$15,462.95
9	25	$22,500	0.656	$14,754.72
10	26	$22,500	0.626	$14,078.93
11	27	$22,500	0.597	$13,434.09
12	28	$22,500	0.570	$12,818.79
13	29	$22,500	0.544	$12,231.67
14	30	$22,500	0.519	$11,671.44
14	30	$500,000	0.519	$259,365.40
			PV(coupon)	$484,960.34
		Premium on bond	$484,960.34
		Market Price	$484,960.34

Answer 3)

The problem will be solved by use of Gordon Constant Growth of dividend valuation method.

Vlaue of Share = V₁ + V₂

V₁ = Dividend / ( 1+r) ^ n

V₂ = D₀(1+g) / k- g ,

D₀ = dividend per share ,$ 0.85

k = Required rate, 15%

G = Growth in dividends (in perpetuity), 4%

V₁ = D / (1 +r) ^ t = $ 0.85/ (1.15) ^ 5 = $ 0.423

V₂ = $8.036

Value = $8.459 =$ 8.5

Answer 4)

Number of new share required = Required Fund / Price per share

= 2663636 shares

Right ratio = No ofexisting shares/ No of new shares = 3 shares

option d