State two features regarding debt and equity instruments that result in equity instruments having a higher cost of capital

The Australian Treasury is issuing 10-year bonds that have a face value of $100 paying half-yearly coupons at 4% p.a. The bonds mature at par. Spencer purchases the bonds at the issue date that are priced at a yield to maturity of 5.2% p.a. Calculate the size of each coupon payment giving your answer correct to the nearest cent.

The Australian Treasury is issuing 10-year bonds that have a face value of $100 paying half-yearly coupons at 4% p.a. The bonds mature at par. Spencer purchases the bonds that are priced at a yield to maturity of 5.2% p.a. Calculate the bond price Spencer paid, giving your answer correct to the nearest 0.1 cent.

The Australian Treasury is issuing 10-year bonds that have a face value of $100 paying half-yearly coupons at 4% p.a. The bonds mature at par. Spencer purchases the bonds that are priced at a yield to maturity of 5.2% p.a. If Lisa buys the bond from Spencer in 2 years' time for $95.115, has the yield to maturity risen or fallen?

Everlast Corporation is expecting to pay $0.66 in dividends at the end of the year. The company pays half-yearly dividends and they do not expect the dividends to increase. Today the company's stock price is $11. Calculate the effective annual return on equity implied by the price, giving your answer as a % correct to 2 decimal places

Unsworth Investments is offering securities that will promise to pay investors a quarterly distribution of $0.10 and is expected to grow at 0.5% per quarter. The first distribution is in three months' time. Calculate the fair value of this security if the market prices it at 10% p.a. Give your answer correct to the nearest cent.

Explain two factors that may impact on the return on equity for a company.

A company can invest in building a factory that will cost $75m. The factory is expected to deliver $30m of net revenue for the first four years and then $40m in the next four years. The factory will be expected to have a salvage value of $3m and is depreciated using the straight line method. The risk-adjusted discount rate is 17% p.a.

a) What is the definition of the risk-adjusted discount rate in the context of this project? (0.5 marks)

b) Calculate the free cashflows for years 1 to 8 in millions of dollars.

c) Calculate the net present value in millions of dollars correct to 3 decimal places and interpret your answer. (1.5 marks)

d) Calculate the discounted payback period in years correct to two decimal places. (1 mark)

e) What will happen to the internal rate of return if the risk-adjusted discount rate of the project decreases to 15% p.a. and everything else is constant? (1 mark)

National Foods Limited reported a Net Profit After Tax of $50m for the year. Explain one factor that may determine how much dividends they will pay their shareholders for this year.

Question 1

1. What would happen in the options market if the price of an American call were less than the value Max (0, S0 − X)? Would your answer differ if the option were European? Explain.

2. Critique the following statement made by an options investor in American call option: “My call option is very deep in-the-money. I don’t see how it can go any higher. I think I should exercise it.”

3. Why do higher interest rates lead to higher call option prices but lower put option

prices?

4. Suppose a European put price exceeds the value predicted by put–call parity. How could an investor profit? Demonstrate that your strategy is correct by constructing a payoff table showing the outcomes at expiration.

5. Consider a two-period, two-state world. Let the current stock price be 45 and the risk-free rate be 5 percent. Each period the stock price can go either up by 10 percent or down by 10 percent. A call option expiring at the end of the second period has an exercise price of 40.
   1. Find the stock price sequence.
   2. Determine the possible prices of the call at expiration.
   3. Find the possible prices of the call at the end of the first period.
   4. What is the current price of the call?

Question 2

1. A portfolio manager desires to generate $10 million 100 days from now from a portfolio that is quite similar in composition to the S&P 100 index. She requests a quote on a short position in a 100-day forward contract based on the index with a notional amount of $I0 million and gets a quote of $25.2. If the index level at the settlement date is $35.7, calculate the amount the manager will pay or receive to settle the contract.

2. A forward contract covering a $10 million face value of T-bills that will have 100 days to maturity at contract settlement is priced at 1.96 on a discount yield basis. Compute the dollar amount the long must pay at settlement for the T-bills.

3. Consider an FRA that:
   • Expires/settles in 30 days.
   • Is based on a notional principal amount of $1 million.
   • Is based on 9O-day LIBOR.
   • Specifies a forward rate of 5%.

Assume that the annual 9O-day LIBOR 30-days from now (at expiration) is 6%. Compute the cash settlement payment at expiration and identify which party makes the payment.

4. Consider a long position of five July wheat contract futures contract each of which covers 5,000 bushels. Assume that the contract price is $2.00 per bushel and that each contract requires an initial margin deposit of $150 and a maintenance margin of $100. Compute the margin balance for this position after a 2-cent decrease in price on Day 1, a l-cent increase in price on Day 2, and a l-cent decrease in price on Day 3.

5. BB can borrow in the United States for 9%, while AA has to pay 10% to borrow in the United States. AA can borrow in Australia for 7%, while BB has to pay 8% to borrow in Australia. BB will be doing business in Australia and needs AUD, while AA will be doing business in the United States and needs USD. The exchange rate is 2AUD/USD. AA needs USD1.0 million, and BB needs AUD2.0 million. They decide to borrow the funds locally and swap the borrowed funds. The swap period is for five years. Calculate the cash flows for this swap.

Question 3

1. Explain why an option’s time value is greatest when the stock price is near the exercise price and why it nearly disappears when the option is deep-in- or out-of- the-money.

2. Call prices are directly related to the stock’s volatility, yet higher volatility means that

the stock price can go lower. How would you resolve this apparent paradox?

3. The value Max [0, X (1+r) ^−T − S0] was shown to be the lowest possible value of a European put. Why is this value irrelevant for an American put?

4. Buying an at-the-money put has a greater return potential than buying an out-of- the-money put because it is more likely to be in-the-money. Appraise this statement.

5. Explain the advantages and disadvantages to a covered call writer of closing out the position prior to expiration.

Question 4

Suppose that each of two investments has a 4% chance of a loss of $10 million, a 2% chance of a loss of $1 million, and a 94% chance of a profit of $1 million. They are independent of each other.

1. What is the VaR for one of the investments when the confidence level is

95%?

2. What is the expected shortfall when the confidence level is 95%?

3. What is the VaR for a portfolio consisting of the two investments when the

confidence level is 95%?

4. What is the expected shortfall for a portfolio consisting of the two

investments when the confidence level is 95%?

5. Show that, in this example, VaR does not satisfy the subadditivity condition, whereas expected shortfall does.

1.Suppose a firm is producing concrete with the following Cobb-Douglas production function:c = s0.5g 0.5where c is pounds of concrete, s is pounds of cement, and g is pounds of gravel. It wants to produce 100 pounds of concrete.

a.What is the marginal product of cement (i.e., by how much does output change if you add more cement, holding gravel constant)? What is the marginal product of gravel (i.e., by how much does output change if you add more gravel, holding cement constant)? How does the marginal product of gravel change if you add more cement? If you add more gravel? Show this mathematically (Hint: think second derivative)

b. Calculate the marginal rate of technical substitution (MRTS).Plot five different combinations of cement and gravel that would allow you to produce 100 pounds of concrete.Draw a series of isoquantson the same axes.

c.Suppose the firm is using 100 pounds of cement and 100pounds of gravel to produce the 100 pounds of concrete. Suppose further than the price of cement is $10 per pound and the price of gravel is $5 per pound. How much does it cost to produce 100 pounds of concrete? Find a combination of gravel and cement that would allow you to produce 100 pounds of concrete at a lower cost.

d.In this part of the question, we will look at how output changes when inputs are doubled.

i.What happens to output if the firm doubles both inputs, from 100 to 200?

ii.Suppose that the production function is instead c = s0.6g 0.6. How much output will 100 pounds of cement and 100 pounds of gravel produce now? What happens to output if the firm doubles both inputs?

iii.Suppose that the production function is instead c = s0.4g 0.4. How much output will 100 pounds of cement and 100 pounds of gravel produce now? What happens to output if the firm doubles both inputs?

iv.What does this tell you about the coefficients on a Cobb-Douglas production function?

5. Assume that the probability that a person is infected with COVID is 0.02 in your area. If you randomly select people off the street,

(a) what is the probability that the first person to test positive is the seventh person tested?

(b) How many people would you have test before you discover your first person to test positive?

(c) If you alow plus or minus one standard deviation, what is the range you might expect the first person to test positive? (Note: For all questions, assume the test is 100 percent accurate!)

Spanner company is a retailer that uses the periodic inventory system. on march 1, it had 100 units of product m at a cost of $1590. On march 6 spanner purchased 200 units of m for $3600. on march 10 it purchased 125 units of m for $3000. on march 15 it sold 200 units of m for $6000. calculate the march cost of goods sold and ending inventory at march 31 using (A) first in-first out (B) last in first out and (C) the weighted-average cost method. round your final answer to the nearest dollar.

1. Given the schedules #1 and #2 shown below:
A. plot, draw, label supply and demand curves and estimate Pe and Qe.
B. if the government sets a price floor for this product at $8, what will the result be? Illustrate the price floor on your graph and describe the result as precisely as possible.
C. if the government reverses itself and places a price ceiling on this product at $4, show the price ceiling on your graph and precisely describe the result.
D. if Schedule #2 shifts to Schedule #3, what will the equilibrium values for Pe and Qe become? What could have caused such a shift?

2. A. Define “demand” as an economist would.
B. List and explain three (3) non-price determinants of demand that can shift the demand curve.
C. Explain the difference between “a change in demand” and “a change in quantity demanded.” Use of a graph is encouraged but not required.

3.

A. Identify two (2) functions of price in the market economy.
B. Explain how price is determined in the market economy.
C. What are the possible results if the government interferes with the price level that the free market has determined? Explain how those results could occur and illustrate with an appropriate supply and demand graph.

3-year horizon

10-year bond

face value 100

5% coupon

initial y-t-m 5.75%

first reinvestment rate 4%

second reinv rate 4.2%

y-t-m in three years 5.8%

rather than reinvesting the first coupon at 4% for two years, invest it for one year at 4% and then combine those proceeds with the second coupon to reinvest at 4.2%. Calculate ROR

Two firms in the same industry sell their product at $10 per unit, but one firm has TFC = $100 and AVC = $6 while the other has TFC’ = $300 and AVC’ = $3.33.

1. Determine the breakeven output of each firm. Why is the breakeven output of the second firm larger than that of the first firm?
2. Find the degree of the contribution margin for each firm at profit= 600 for the first firm and at profit = 700 for the second firm.

c. What is the present value (i.e., the value at t = 0, where t counts years) of the following stream of payments if the effective annual interest rate is .03 (i.e., 3% per annum): The first payment of $100 is made in 10 years (at t = 10). There are 10 more payments after that first payment that occur every 1.5 years. Each of these subsequent payments are 5% larger than the previous payment.