THE FOLLOWING INFORMATION RELATES TO QUESTIONS 1 - 5 Davo Corp Ltd is a large investment company, which has investments in two of the following industries: | Expected Return | Beta | Covariance with the Market | Standard Deviation | Mining | ? | ? | 0.068 | 0.50 | Transport | 0.14 | 1.5 | ? | ? | Building | ? | 2.0 | ? | ? | Alcohol | ? | ? | 0.032 | 0.35 | Market Index | ? | 1 | ? | 0.20 | The ten-year bond rate (risk free rate) is 5%. The proportion of the two industries in Davo Corps investment portfolio is as follows: Mining 60% and Alcohol 40%.
QUESTION 1 What is the beta of Mining?
QUESTION 2 What is the expected return on Show all workings. Marks are awarded for workings THE FOLLOWING INFORMATION RELATES TO QUESTIONS 15 - 16 A company is considering the issue of some first mortgage debentures for fund raising purposes. The debentures have a par value of $100, a coupon rate of 10% is paid annually over a 3 year term. The tax rate is 40%. Given the current market rate of interest for debentures of this risk class, it is anticipated that the debentures will sell for $95.19.
QUESTION 15 Why do you think that the before tax cost of debt will be greater than 10%?
QUESTION 16 Calculate the after tax cost of debt to the firm. THE FOLLOWING INFORMATION RELATES TO QUESTIONS 17 - 18 Wally owns a taxi license and plans to retire sometime in the next 4 years. The license is a valuable asset and can be sold in the market to prospective owners. At the present time (2003), the license is worth $140,000 and it is anticipated that its market value (after tax) over the coming years will be as follows: 2004 2005 2006 2007 $145,000 $150,000 $155,000 $160,000 The business has been relatively profitable, with the after tax cash flow for the year just completed being $30,000. Wally has predicted the following after tax cash flows for the coming years: 2004 2005 2006 2007 $32,000 $35,000 $32,000
