Company ABC has just announced earnings of $2 per share. Based on the last five years, earnings have grown at a rate of 20% per annum and the company expects this to continue for the next five years, after which it expects earnings to remain constant forever. The company has a policy of paying out 30% of its earnings as dividends. ABC stock has a beta of 1.2. The yield to maturity on 10-year government bonds is 2% and market risk premium is 10%.

(a) Calculate the current value per share.

(b) If the stock is currently trading in the market at $10 per share, comment on whether any profits can be made. What form of market efficiency prevails if this occurs? Examine the other two (2) forms of market efficiency and what the observation on the stock price here implies in terms of market efficiency.

(c) The company plans to issue a 7-year bond in the near future to finance expansion into neighbouring countries. It expects interest rates to fall in 3 years’ time. State and describe two (2) possible types of bonds the company could issue. Analyse how the company can determine the pricing for its bond issue?

The accuracy of a coin-counter machine is gauged to accept nickels with a mean diameter of millimeters 21.21 mm. A sample of 39 nickles was drawn from a reported defective coin counter machine located near a school. The sample had a sample mean of 21.21 mm and sample standard deviation 0.011 mm. Test the claim that the mean nickel diameter accepted by this coin-counter machine is greater than 21.21 mm. Test at the 0.01 significance level.

(a) Identify the correct alternative hypothesis :

μ < 21.21

μ = 21.21

μ > 21.21

Give all answers correct to 4 decimal places.

(b) The test statistic value is:

(c) Using the Traditional method, the critical value is:

(d) Based on your answers above, do you:

(i) Reject Ho

(ii) Fail to reject Ho.

Explain your choice in the box below.

e) Based on your work above, choose one of the following conclusions of your test:

(i) the sample data supports the claim,

(ii) there is not sufficient evidence to support the claim,

(iii) there is sufficient evidence to warrant rejection of the claim

(iv) there is not sufficient evidence to warrant rejection of the claim.

Explain your choice in the box below.

Company ABC has just announced earnings of $2 per share. Based on the last five years, earnings have grown at a rate of 20% per annum and the company expects this to continue for the next five years, after which it expects earnings to remain constant forever. The company has a policy of paying out 30% of its earnings as dividends. ABC stock has a beta of 1.2. The yield to maturity on 10-year government bonds is 2% and market risk premium is 10%. (a) Calculate the current value per share. (b) If the stock is currently trading in the market at $10 per share, comment on whether any profits can be made. What form of market efficiency prevails if this occurs? Examine the other two (2) forms of market efficiency and what the observation on the stock price here implies in terms of market efficiency. (c) The company plans to issue a 7-year bond in the near future to finance expansion into neighbouring countries. It expects interest rates to fall in 3 years’ time. State and describe two (2) possible types of bonds the company could issue. Analyse how the company can determine the pricing for its bond issue?

Company ABC has just announced earnings of $2 per share. Based on the last five years, earnings have grown at a rate of 20% per annum and the company expects this to continue for the next five years, after which it expects earnings to remain constant forever. The company has a policy of paying out 30% of its earnings as dividends. ABC stock has a beta of 1.2. The yield to maturity on 10-year government bonds is 2% and market risk premium is 10%.

(a) Calculate the current value per share.

(b) If the stock is currently trading in the market at $10 per share, comment on whether any profits can be made. What form of market efficiency prevails if this occurs? Examine the other two (2) forms of market efficiency and what the observation on the stock price here implies in terms of market efficiency.

(c) The company plans to issue a 7-year bond in the near future to finance expansion into neighbouring countries. It expects interest rates to fall in 3 years’ time. State and describe two (2) possible types of bonds the company could issue. Analyse how the company can determine the pricing for its bond issue?

QUESTION TWO
Investment Environment & Management Process
Floro is a young energetic lady aged 23, she is in excellent health, she lives a simple but active lifestyle, and currently childless. Through her boyfriend’s advice who is a Finance guru, she has developed interest in investment related activities and has interest in investing K70, 000 resources given to her upon her graduation from Mulungushi University as a present from her boyfriend. She doesn’t want her boyfriend to know about these plans and decides to seek for advice from you as an investment scholar. She is currently unemployed but is actively looking for full-time employment which is promising to come by any moment. She is also looking forward to starting a family in the near future. Currently, the following assets are available for use in building an appropriate portfolio:
a. What comprehensive Investment policy statement would you formulate for Floro? It should be inclusive of important Objectives and constraints.
b. Given the information, what long term asset allocation (Minimum Three Assets) would you provide for the investment Policy statement and what assumptions are you putting in place to justify its usage.

QUESTION TWO Investment Environment & Management Process Floro is a young energetic lady aged 23, she is in excellent health, she lives a simple but active lifestyle, and currently childless. Through her boyfriend’s advice who is a Finance guru, she has developed interest in investment related activities and has interest in investing K70, 000 resources given to her upon her graduation from Mulungushi University as a present from her boyfriend. She doesn’t want her boyfriend to know about these plans and decides to seek for advice from you as an investment scholar. She is currently unemployed but is actively looking for full-time employment which is promising to come by any moment. She is also looking forward to starting a family in the near future. Currently, the following assets are available for use in building an appropriate portfolio: a. What comprehensive Investment policy statement would you formulate for Floro? It should be inclusive of important Objectives and constraints. b. Given the information, what long term asset allocation (Minimum Three Assets) would you provide for the investment Policy statement and what assumptions are you putting in place to justify its usage.

True or False

1._____ Dividends in arrears on cumulative preferred stock need not be recorded as a liability.

2._____All long-term debt maturing within the next year must be classified as a current liability on the balance sheet.

3._____ A company is a plaintiff in a lawsuit. It should accrue the estimated gain from the judgment if information indicates that it is virtually certain and the amount can be reasonably estimated.

4._____The revenue from a service-type warranty that covers several years should all be recognized in the period the warranty is sold.

5._____Under an assurance-type warranty, companies charge warranty costs only to the period in which they comply with the warranty.

6._____Prepaid insurance should be included in the numerator when computing the acid-test (quick) ratio.

7._____Current liabilities are usually recorded and reported in financial statements at their full maturity value.

8._____Debt securities held as an investment include corporate bonds and convertible debt, but not U.S. government securities.

9._____Securities classified as trading securities are securities bought and held primarily for sale in the near-term to generate income on short-term price differences.

10._____Unrealized holding gains and losses are recognized in net income for available-for-sale debt securities.

Commercial Law Question

Ben was an alumnus of HKU. He joined Wonder Sports Supplies Limited as a marketing assistant after graduated a year ago. Last Saturday, he took a recently marketed skateboard from his employer without permission and wanted to try it out near the HKU campus.

Ben was so excited to be back to the HKU campus again. He jumped onto the skateboard and started off despite the fact that he was not very skillful in this sport. Skateboarding on the lane in front of the HKU Residential College, Ben decided to go all the way along Bonham Road to Block D. As he was going down the slope, he started to accelerate at high speed and finally lost control. Ben skateboard ran into Tom, who was walking with his back towards the skateboard. Tom was knocked down by Ben, broke his left arm and injured his head. He was then rushed to the hospital by an ambulance.

Required:

(a)     Discuss whether Tom can bring an action against Ben for his injuries based on tort of negligence.

(b)     Explain the concept of vicarious liability. Discuss whether Tom can sue Wonder Sports Supplies Limited instead of Ben.

Please read the "Bernard L. Madoff: The Fraud of the Century" case study (C37 in the Case Study section near the end of textbook).

Required:

After reading the case, please respond to the following questions:

1. Under the fundamental principles governing an audit covered in Chapter 2, we learned that auditors are required to exercise due care and maintain professional skepticism throughout the audit. Based on the case information, do you believe that the auditors from Friehling & Horowitz exercised due care and maintained professional skepticism throughout the audit? Why or why not?
2. After the Madoff case, the SEC instituted a number of reforms to its operations. Please visit the SEC's website (www.sec.gov (Links to an external site.)Links to an external site.) and search for Post-Madoff reforms. Next, please identify the two reforms that you believe will have the best chance of detecting illegal activity such as the activities of Madoff. Make sure to provide justification for your choices.
3. Consider section 24 of the Securities Act of 1933 and section 32 of the Securities Exchange Act of 1934 (see Module C in Part III of textbook). Based on the case information, do you believe that Madoff's auditor, Friehling, should be facing criminal charges? Why or why not?