SMU Classification: Restricted

Assignment 1

1) Cheeta Corp currently has $50 million debt, $50 million preference shares and $100 million
shareholders' funds in its balance sheet. Its debt comprises a 6% semi-annual coupon bond
maturing in 20 years' time. The bond is currently traded at $945. Cheeta's 5% preference shares,
which were issued at $100, are currently traded at $75. Its outstanding 3.5 million shares
currently sell for $20 per share and pay dividends of $1.2. The company is regarded as a mature
stock whose beta is 0.92. The current risk free rate is 4% while the long-term market return is
10%. The corporate tax rate is 22%.
Cheeta's weighted average cost of capital (WACC) is _______.

2) Assuming all factors remain unchanged, which one of the following would reduce a firm's
price/earnings ratio?
a) The dividend payout ratio increases.
b) The yield on a risk-free asset increases.
c) The level of inflation is expected to decline.
d) All of the above.
e) None ofthe above.

3) An analyst has gathered the following data for Webco, Inc:

Retention ratio 40%
ROE 25%
Cost of equity 14%
Using the infinite period constant growth dividend model to evaluate the price of security and
assuming that next year's earnings will be $4.25, the price will be ______.

4) A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index
most likely has _____.
a) an anticipated earnings growth rate which is less than that of the average firm.
b) a dividend yield which is less than that of the average firm.
c) less predictable earnings growth than that of the average firm.
d) greater cyclicality of earnings growth than that of the average firm.
e) none of the above.

5) Linda Li, CFA, has just completed an analysis of Tiger Inc. She forecasts that the company's
earnings per share will be $63. Her analysis further indicates an earnings multiple of 17.2. If
shares are currently trading at a price of $910.10 and Tiger is expected to pay a dividend of
$15.93, the expected return over the next year (to the close 0.1%) is ______.

6) Creative Toys Limited has total assets of $400 million, total liabilities of $100 million and
preferred equity of $25 million. The stock is trading at $10 per share. If the company has 100
million shares outstanding, it's price/book value ratio will be closest to ______.

7) Brianna Tan, CFA is evaluating the stock of Seowei Shipping Inc., which recently went public.
She expects Seowei Shipping's first dividend to be paid in five years in the amount of $5 per
share and that the company will maintain a dividend payout ratio of 30% after that.
Tan estimates the company's cost of equity is 18% and its return on equity is a constant 8%.
Based on this information, Seowei Shipping's intrinsic value per share to the nearest dollar is
______.