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Questions 1 - 6 carry equal marks of 13 each, question 7 carries 22 marks. Answer all questions Q1. Answer the following questions. a. What is the Optimal Capital Structure? Explain with a graph. b....

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Questions 1 - 6 ca
y equal marks of 13 each, question 7 ca
ies 22 marks. Answer all questions
Q1. Answer the following questions.
a. What is the Optimal Capital Structure? Explain with a graph.
. What is diversification in Finance? Explain.
c. Explain the differences between American and European options.
Q2. Provide appropriate answers to the following questions.
a. What are differences between future and forward contracts? Explain.
. Explain 3 forms of market efficiencies.
c. Explain the term structure of interest rates.
Q3. If government bonds are cu
ently paying 7 per cent and the inflation rate is 2.1 per cent, what is the approximate real rate? What is the exact real rate?
Q4. The following information relates to Rio Tinto Mining Corporation. What is Rio Tinto’s weighted average cost of capital?
●     10 years ago, Rio Tinto issued 80,000 bonds with 16 years maturity and a face value of $1000 each, pays an – annual coupon amount of $100 each. The yield on the bonds is 15% p.a. Rio Tinto’s marginal corporate tax rate is 30%.
●     Rio Tinto has 15 million preference shares on issue, which are cu
ently trading for $3.20 each, giving total market value of $48 million. They pay an annual dividend of 30 cents per share.
●     Rio Tinto has 21.5 million ordinary shares on issue, which are cu
ently trading for $4 each. These shares are expected to pay an annual dividend of $0.75 next year, and this dividend is expected to grow at the constant rate of 3% in perpetuity.
Q5. Use the following option quotes to answer the questions below.
                December, 2019, Alibaba Ltd
                 Last sale price $16.00
            Calls – Last            Puts - Last
Strike Price Jun XXXXXXXXXXJuly XXXXXXXXXXAug XXXXXXXXXXJun XXXXXXXXXXJuly XXXXXXXXXXAug    
$ XXXXXXXXXXcents 48 cents 72 cents XXXXXXXXXXcent 27 cents XXXXXXXXXXcents
a. Suppose you buy 150 July $16.00 call contracts. How much will you pay, ignoring commissions?
. Suppose you buy 50 of August 2019 put contracts. What is your maximum net gain?
On the expiration date, Alibaba is selling for $14.00 per share. What are your options worth?
c. In part (b), suppose you sold your 50 August put contracts. What is your net gain or loss if Alibaba is selling for $13.00?
                
Q6. You would like to invest in two shares A and B. The return on these shares over the next year depends on the state of economy, which will be described as “Boom”, “Normal”, “Slow” and “Recession”. The table below shows the probability of each of these states of economy, and the expected return on each share given each possible state of the economy. The co
elation coefficient between shares A and B is 0.5.
    State of the economy
    Probability
    A Return
    B Return
    Boom
    0.20
    0.25
    0.21
    Normal
    0.40
    0.16
    0.12
    Slow
    0.25
    0.10
    0.08
    Recession
    0.15
     XXXXXXXXXX0.06
    0.05
a. What is the expected return on A and B shares?
. What is the standard deviation of A and B shares?
c. What is the expected return on portfolio comprised of 55% invested in share A and the balance in share B?
d. What is the standard deviation on portfolio comprised of 55% invested in share A and 45% invested in share B?
Q7. The risky portfolio Q consists of 2,500 shares of Google and 7,500 shares of Yahoo. Assume that Google has a share price of $4, an expected return of 18 per cent, and a standard deviation of 25 per cent. Yahoo has a share price of $2, an expected return of 15 per cent, and a standard deviation of 20 per cent. The co
elation between the two is 0.5, and the risk-free rate of interest is 2 per cent.
What fraction of your portfolio must you invest in risky portfolio of Q and risk-free to have a portfolio standard deviation of 12 per cent?
T317 Final Examination: ACC700 PG – Principles of Accounting XXXXXXXXXXpage 1 of 36
T120 Take Home Final Examination: FIN200 UG – Corporate Financial Management.    Page 2 of 3
Answered Same Day Jun 14, 2021 ACC700 Deakin University

Solution

Harshit answered on Jun 15 2021
144 Votes
FINANCIAL MANAGEMENT
    Sl.no.
    Contents
    Page Numbe
    
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Question 1
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2
    
Question 2
    3-4
    
3
    
Question 3
    5
    
4
    
Question 4
    6
    
5
    
Question 5
    7
    
6
    
Question 6
    8-9
    
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Question 7
    10
ANSWER TO QUESTION 1
a) Optimal Capital Structure: It is the blend of the debt and equity in such a way so that the weighted average cost of capital of the company is minimized. This also leads to the maximization of the valuation of the company. The debts increase the risk of investment in a company and are a cheaper source of finance. The company gets a tax shield for payment of interest. Equity means the owner's fund that is invested in the company for running the business operations. The optimal debt-equity ratio is considered to be at 2:1.
The following depicts the optimum capital structure:
) Diversification in financial management means the investor invests in various sources of finances along with different companies based on industry or size. In a portfolio of an investor, he should invest in a variety of stocks. Due to the diversification of the portfolio, the unsystematic risk in the stocks gets canceled off against one another. The loss of one company is compensated by profit on another company. This reduces the rate of return in the short run but increases wealth in the long run.
c) Difference between the European Options and the American Options are as follows:
    
EUROPEAN OPTIONS
    
AMERICAN OPTIONS
    · These options have a lower level of risk as the date and price are pre-determined which helps in estimating the profit or loss in advance.
    · These options have higher risks since the option can be exercised anytime and estimation of profit or loss cannot be made.
    · The premium under this option is low.
    · The premium under this option is high
    · The tax treatment in case of European options are 60% long term capital gains
    · The tax treatment in the case of American option is 100% short term capital gains.
    · European Options can be settled only in cash.
    · American Option can be settled only in stocks.
ANSWER TO QUESTION 2
a) Difference between the forward contract and future contracts are as follows:
    FORWARD CONTRACT
    FUTURE CONTRACTS
    · These are traded privately over the counter.
    · These can be traded over the counter as well as publicly traded on a futures exchange.
    · More customized as per the specifications of the parties
    · These are more general and standardized.
    · Generally used for hedging
    · Generally used in speculation
    · These are not...
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