Shares - Theory only
What are:
- Dividend payments
- Capital gains/losses from changes in market value
Given the shares of Company X are trading at $3.88 and the EPS of Company X is .53, the P/E ratio for Company X is (to 2 d.p places is)
What is:
7.32
The acronym for Australia's main marketplace for shares and stocks. (bonus 100 for full name)
What is:
- The ASX
- Australian Securities Exchange
The two components of return from a bond held to maturity:
What are:
- Face value / maturity payment
- Coupon payments
Three characteristics of Ordinary Shares:
What is (options):
• Represent ownership of a company
• Typically have no maturity date
• Can have their ownership transferred
• Are limited liability when fully paid
• Entitle their owners to a share of profits which are paid as dividends
• Entitle their owners to vote in company elections
• Have potential for capital gains
WBC’s annual dividend has grown from $1.24 in 2000 to $1.96 in 2018.
Estimate the annual dividend growth rate over this period (to 2 d.p).
What is:
2.58%
Refers to the process of decision-making by a company’s top management, and
how these managers are held responsible for their management of the company
What is:
- Corporate governance?
A type of bond where the coupon rate is greater than the YTM and the Price is greater than the Face Value
What is:
A premium bond?
Risk-taking, wealthy, patient investors who participate in the running of the firm
during its development stage
What are:
Business angels?
Stock in CDB Industries has a beta of 0.90. The market risk premium is 8 percent, and T-bills are currently yielding 4.5 percent. CDB's most recent dividend was $2.60 per share and dividends are expected to grow at a 5 percent annual rate indefinitely. The stock sells for $48 per share. Calculate the required return on Equity using CAPM:
Using the CAPM, we find:
RE = .045+ 0.90(.08) = .1170 or 11.70%
What is: market discipline?
A bond trading at par with a face value of $25000, a yield to maturity of 7.5% p.a, was issued 3 years ago and has 7 years to maturity. The coupon rate is:
What is: 7.5%
The two ways of assessing a share's value, as well as a brief description of these techniques (200 points for each method and description):
What is:
- Technical analysis: uses past data in the attempt to identify future price trends, or behavioural techniques such as momentum trading
- Fundamental analysis: Attempts to calculate share value as the present value of
future value, having regard to the risks involved ---> in a attempt to find fair/intrinsic value
Use Gordon’s model to value WBC shares given a dividend of 1.96 and a growth rate of 2.58%, given a required rate of return of 9% p.a (to 2 d.p)
What is:
$31.32
Refers to the increased level of crossings - where a broker arranges for a share trade to occur privately (which is reported to the market once completed)
– they are used to trade very large parcels of shares to avoid negative price consequences
What are:
Dark pools?
Calculate the yield on an investment in the 2.95%, 21 April 2029 bond, held to maturity, made on 21 April 2019 at 3.5%, assuming the remaining coupons are reinvested at 3.1%. The price paid for the bond is:
What is:
Pricebought = 95.39295764
Discuss the main advantages and disadvantages of an IPO for an emerging business (3 advantages and 3 disadvantages for max points)
What are:
Advantages
• An enhanced capacity to raise additional capital.
• Raising equity funds increases the firm’s financial strength.
• Provides the owners with liquidity.
• An improved capacity to remunerate management/employees.
Disadvantages
• The dilution of control for the original owners.
• The cost of the IPO process (expensive).
• The agency costs associated with the separation of ownership and management.
• Market scrutiny can impose a short-term bias on decision-making.
A firm’s share price is currently $8.3, and its most recent EPS is $0.42. Suppose you forecast the firm’s earnings will permanently increase to $0.56 per share. What future share price would you expect?
Current P/E = 19.76 (2 d.p)
Forecasted share price = 19.76 * .56 = 11.07 (2 d.p)
The role/function of the Share Market and its function as a secondary market (3 main functions):
- The basic function of a share market is to organise the trading in corporate
securities – principally shares
As a secondary market:
- It performs price discovery
- It provides investors with liquidity
- It facilitates the flow of funds by pooling equity investments
Calculate the yield on an investment in the 2.95%, 21 April 2029 bond, held to maturity, made on 21 April 2019 at 3.5%, assuming the remaining coupons are reinvested at 3.1%. What is the holding period yield? (to 2 d.p)
What is: 3.45%?