In this chapter we will study that how more than one factor which is associated with expected return, are evaluated on capital asset pricing model. We have described earlier that beta specifies the inclination level or slope of characteristic line and this is denoted by βj. Extended capital asset pricing model evaluates many factors other than beta, to calculate the expected return of a security. We can add or include some other factors to the equation of expected return of a security, to gain more information about expected returns and the effects of certain financial institutions on securities. An investor can get two type f returns on his security. First one is called the dividend. It is the amount of money that a company gives to its shareholders, from its profits. Dividend can be received even before the security reaches at maturity level. It can be received during holding period of that security but it is taxable also. Second one is called capital gain or capital loss that occurs only when a stock is sold. Capital gain is the profit that an investor gets on his investment in capital assets. Capital asset pricing model will normally generate similar results, when no taxes are being paid by the investor or the results will remain unaffected. In many countries, dividends are charged with more taxes compared to capital gains. Systematic bias effect is that investors have to pay higher tax on their stocks that yield high dividend and same is with the stocks that yield low return in order to counteract the effect of taxes. If systematic bias exists in the market then the expected return will depend on two things first is beta and second one is dividend yield .In such situation it would be a better choice to plot a three dimensional security market Surface. Expected return is on X-axis of three dimensional security market Surface and beta nd dividend yield are on other two axes. This surface shows that higher beta and higher dividend can ultimately leads to higher...

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3210AFE
ADVANCE CORPORATEFINANCE
Financial Analysis Report
New Hope Coal Corporation
(4780 words)
STUDENT NAME: Member 1: S2704148 zhiqi Liu
Member 2: S2682143 Sai Tie
Member 3: S2730145 Lingfeng Zhan
Member 4: S2594576 Xindan Chen
Member 5: S2700906 Yinghui Huang
TABLES
Executive summary............................................................................................3
Introduction........................................................................................................6
Firm structure and corporate governance.......................................................6
Remuneration….................................................................................................8
Capital structure.................................................................................................9
CAPM BETA AND FACTOR MODEL ANALYSIS……………………….9
WACC Analysis..................................................................................................11
Firm Estimation by FCF and PE ratio.............................................................12
Growth project analysis.....................................................................................13
Mergers and Acquisitions Targets Analysis…………………………………16
Cost of Debt & Equity...

...the market and industry risks that are out of his control.
13. What specific source of funding would TRUST choose to use for the expansion project scheduled for next year? Assume TRUT’s financial position next year would be the same as of 31/12/13?
Assuming TRUST’s financial position will be the same as of 31/12/13, TRUST should choose to fund the expansion project using retained earnings as a source.
14. What should be the amount of the final dividend to be declared for financial year 2013? Explain.
Although management has the final say on what price they wish to set dividends, the final dividend in TRUST’s scenario must be equal to or be below the EPS of 27.6cents as dividends are paid out of earnings. Through a thorough analysis, the dividends may very well be set below that of the EPS in view of the earnings performance and capital requirements needed.
15. Calculate the alternative divisional WACC using the 3-step procedures in paragraph 21.
Step 1:
Opportunity cost = r = rD x D/V + rE x E/V
r 0.080680637
Step 2:
rE = r + (r - rD) D/E
rE 0.100258054
Step 3:
WACC = rD(1-Tc)(D) + rE(E)
WACC 0.077530637
16. Use the cost of equity in q1 and the dividend growth formula Price=DPS1/(43 – growth rate) to work out the implied total dividend for next year. Assume a constant growth rate of 3.4%. Is this the implied dividend amount for 2014 reasonable/achievable? Explain....

...(1) When calculating NPV, consider opportunity cost, ignore sunk cost.
(2) For bonds, the longer the time to maturity, the greater the interest rate risk;
the lower the coupon rate, the greater the interest rate risk.
(3) -1< 𝜌 ≤ 1 , the smaller the correlation, the greater the risk reduction
potential. If 𝜌 = 1, no risk reduction is possible.
(4)The value of firm is always the same under different capital structures. (MM
Proposition I (no taxes)).
(5) The expected return on equity is positively related to leverage because the
risk to equity holders increase with leverage.(MM Proposition II (no taxes)
𝑉 𝐿 = 𝑉 𝑈 + 𝑡 𝐶 𝐵, 𝑡 𝐶 𝐵 is the present value of the tax shield. 𝑉 𝑈 is unleveraged
firm value.
(6) Goals of CorporateFinance management: maximize the shareholder
wealth/ maximize share price/ maximize firm value.
(7) Stock holders may maximize their wealth at the expense of bondholders:
increasing leverage, increasing dividends, taking risky projects.
(8) Bond concepts: a. Bond prices and market interest rates move in opposite
directions. b. When coupon rate = YTM, price = par value, when coupon rate >
YTM, price > par value(premium bond)
(9) IRR disadvantage: IRR may not exist or there may be multiple IRR;
Problems with mutually exclusive investments(scale problem and timing
problem).
(10) Portfolio risk=nonsystematic risk (diversifiable) + systematic risk
(non-diversifiable).
(11) From the firm’s perspective, the expected...

...
• The Timing Problem
--------------------------------
NET PRESENT VALUE: NPV tells you the additional wealth created by an investment for the firm
LECTURE 4 (CHAP 9+23)
1. Sensitivity Analysis
Sensitivity Analysis proposes
Examine each variable in turn, hold all other variables constant
Why?
To ascertain how much that variable could change and still leave the project with a positive NPV, or IRR greater than the cost of capital.
2. Scenario Analysis
Rather than isolating the affect of a change in a single variable, scenario analysis is used to evaluate the impact on return as a result of simultaneous changes
3. Break-even Analysis
> Useful for analysing the relationship between sales volume and profitability
> Break-even point is the sales volume at which the present value of the project’s cash inflows and outflows are equal, i.e., NPV = 0
> Important distinction between variable costs and fixed costs
> Accounting break-even is the sales volume that results in a zero net profit
Tutorial 5: LEASING
Lease premium = lease base+ interest rate x residual payout.
lease base=lease debt amortisation/ pv annuity factor
lease debt amortisation= cost of asset – residual value
tax savings from lease= (lease premium x tax rate x p.v annuity factor)+/- p.v of tax on loss/gain
LECTURE 6: Long-term financing and issuing securities to public...

...1. Which one of the following is a means by which shareholders can replace company management?
A. stock options
B. promotion
C. Sarbanes-Oxley Act
D. agency play
E. proxy fight
2. Decisions made by financial managers should primarily focus on increasing which one of the following?
A. size of the firm
B. growth rate of the firm
C. gross profit per unit produced
D. market value per share of outstanding stock
E. total sales
3. Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?
A. income statement
B. creditor's statement
C. balance sheet
D. statement of cash flows
E. dividend statement
4. Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?
A. income statement
B. balance sheet
C. statement of cash flows
D. tax reconciliation statement
E. market value report
5. The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate.
A. mean
B. residual
C. total
D. average
E. marginal
EDCAE
6. The cash flow of a firm which is available for distribution to the firm's creditors and stockholders is called the:
A. operating cash flow.
B. net capital spending.
C. net working capital.
D. cash flow from assets.
E. cash flow to stockholders.
7. Canine Supply has sales of $2,200, total assets of $1,400, and a debt-equity ratio of 0.3. Its return on equity is 15...

...1. Refer to the following information:
Stock | E(r) | | Correlation Coefficients |
1 | 0.06 | 0.20 | 1 with 2: -0.10 |
2 | 0.08 | 0.10 | 1 with 3: +0.60 |
3 | 0.15 | 0.15 | 2 with 3: +0.05 |
A portfolio is formed as follows: sell short $1,000 of Stock 1; buy $1,500 of Stock 2; buy $1,500 of Stock 3. The investor uses $1,000 of his own equity, with the remaining amount borrowed at a risk-free interest rate of 4% (with continuous compounding).
(a) Assuming that there are no restrictions on the use of short-sale proceeds, what is this investors expected rate of return?
(b) What are some of the issues associated with short-selling, and what impact could these issues have on the expected return calculated in part (a).
ANSWER
(a) w1 = -1; w2 = 1.5; w3 = 1.5; wr = -1
E(r) = -1*0.06 + 1.5*0.08 + 1.5*0.15 + (-1)*0.04 = 24.5%
(b) short selling is restricted; unable to use proceeds from the short sale; fee for short selling reduces return. All of these restrictions could fundamentally change the return to the portfolio.
2. Consider a European call option on a stock. The stock price is $70, the time to maturity is 12 months, the risk free rate of interest is 10% per annum (with continuous compounding), the exercise price is $65, and the volatility is 32%. A dividend of $1 is expected in six months time. Determine the price of the option using the binomial method with 6-month steps.
ANSWER
3. The current price of silver is $9 per...

...Final Exam Practice Problems
1. Firm ABC’s only outstanding debt is $100,000 worth of coupon bond (market value). Its yield to maturity is 8%. Given that its tax rate is 40%, what is its effective cost of debt?
Effective cost of debt = cost of debt * (1-tax rate) =8%*(1-40%)=4.8%
2. Firm ABC has a stock currently traded at $20. The next year’s dividend will be $0.20. The dividend growth rate is forecasted to be 6% forever. Risk-free rate is 3%, and market risk premium is 4%. Assume that Constant Dividend Growth Model and CAPM give you the same estimate of the cost of capital for equity, what is the beta of its stock?
By the Constant Dividend Growth Model:
Cost of Equity = D/P+g = 0.2/20+6%=7%
By CAPM, cost of equity = R(f)+ beta * market risk premium = 3% + beta* 4%,
Set this to be equal to 7%, solve for beta: beta=1
3. Firm ABC has a cost of equity of 8%, a cost of debt of 5%. It stock is traded at $10/share, and has 10 million shares outstanding. Its debt value is $20 million. Tax rate is 40%. What is its after-tax WACC?
Equity Value = 10*10=$100 million, Debt Value=$20 million
So, equity weight = 100/120=83.3%, debt weight=20/120=16.7%
After-tax WACC= equity weight * cost of equity + debt weight * effective cost of debt
=83.3%*8%+16.7%*5%*(1-40%) = 7.2%
4. Suppose you are the founder of a private company ABC. Initially you raised $500,000 from an angel investor from the first-round financing. As a result, both you and the angel...

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