1. ABC Corp recently paid €3.60 as an annual dividend. Future dividends are projected to be €3.80, €4.10 and €4.25 over the three years, respectively. Beginning 4ears from now, the dividend is expected to increase by 3.25% annually. What is the price of the equity today if a return of 12.5% is offered on similar investments?
2. Explain what is meant by agency costs. Why would we expect managers of a corporation to pursue the objectives of shareholders?
3. If a bond with a face value of €1000 and a coupon rate of 7% is currently selling for €1046, what does that tell you about the current yield to maturity of the bond relative to the bond’s coupon rate? Explain why this is the case.
4. Matt Berry owner of Berry Gold Mining, is evaluating a new gold mine in Tanzania. Meg Little, the company’s geologist, has just finished her analysis of the mine site. She has estimated that the mine would be productive for eight years, after which the gold would be completely mined. Meg has taken an estimate of the gold deposits to Kevin Marshall, the company’s financial officer. Kevin has been asked by Matt to perform an analysis of the new mine and present his recommendation on whether the company should open the new mine. Kevin has used the estimates provided by Meg to determine the revenues that could be expected from the mine. He has also projected the expense of opening the mine, it will cost £500 million today and it will have a cash outflow of £80 million nine years from today in costs associated with closing the mine and reclaiming the area surrounding it. The expected cash flows each year from the mine are shown in the following table. Berry Gold Mining has a 12% required return on all of its gold mines.
Year Cash flow (£)
Should this project be accepted? Use three investment evaluation techniques to arrive at your answer. Explain your recommendation fully. In analysing the mine, Kevin advises Matt that this mine is riskier than other mines in the Berry Gold Mining portfolio and so the discount rate should increase. What impact will this have on the cash flows of the project?