(Solved by Humans)-hi there. i have problems solving questions 4 and 5. could you

Question

?hi there. i have problems solving questions 4 and 5. could you help me solve them?

Question 4 (20 marks) ? Lecture 8: Shareholder value and the cost of capital
a) 4 marks
AJI Limited current share price is $20 and it has just paid a $1 dividend. As AJI is a mature
firm, this $1 dividend is expected to grow at a rate of 4% per year. What is an estimate of the
return shareholders of AJI Ltd expected to earn?
b) 4 marks
AJI also has preference shares outstanding that pays $2 per share fixed dividend. If this stock
is currently priced at $24, what is the return that preference shareholders expect to earn?
c) 4 marks
AJI has issued a 5 year bond with a coupon rate of 11% and par value of $1,000. The price
received by AJI was $1,200. What is AJI?s pre-tax cost of debt?
d) 4 marks
AJI has 5m ordinary shares outstanding and 1m preference shares outstanding. Its liabilities
have a book value of $20m. If AJI?s ordinary and preference shares are priced as in parts a)
and b), what is the market value of the AJI?s assets?
e) 4 marks
AJI faces a 30% tax rate. Given the information in parts a) ? d), and your answer to those
problems, what is AJI?s WACC?

Question 5 (20 marks) ? Lecture 7: Risk and Return:
Your grandfather is planning to invest $25,000 into the following stocks:
Rio Tinto Ltd
Cathay Pacific Airlines

The table below shows the closing prices between 2008 and 2014.
December 2008
December 2009
December 2010
December 2011
December 2012
December 2013
December 2014

Rio Tinto Ltd (RIO.AX)
$29.97
$74.89
$85.47
$60.3
$66.01
$68.18
$58

Cathay Pacific Airlines (0293.HK)
$8.72
$14.48
$21.45
$13.32
$14.22
$16.4
$16.9

The monthly datais collected from Yahoo Finance on 1st of November 2015.

a) 4 marks
For each stock, show the annual stock returns.
b) 4 marks
Based on the annual stock returns, calculate the average stock returns and standard
deviation for each stock.
c) 4 marks
Calculate the covariance and correlation of annual stock returns between these stocks.
d) 4 marks
The risk-free rate is 2.06% per annum. Calculate the Sharpe ratio for Rio Tinto Ltd and Cathay
Pacific Airlines. Which stock is performing better? Explain your answer.
e) 4 marks
Suppose grandfather invests 60% in Rio Tinto and 40% in Cathay Pacific Airlines, calculate the
expected return and standard deviation for this portfolio. Is this portfolio perform better
than the individual stock?