For dollar amounts, give your answer to the nearest cent. For interest rates, give our answer as a percentage rounded to 2 decimal places. e.g In these cases, use the EXACT values from the earlier parts, not the rounded values. For example, if you do the calculation in part a) and you get an answer of exactly $23.456, you would put $23.46 as your response for part a). If part b) requires the answer from part a), then you would use 23.456 and not the rounded value.
1.
a) Discuss two advantages and two disadvantages of going public for firms. (4 marks)
b) A company makes an initial public offering of shares to raise $210 million, at an offer price of $3.50 per share. The issue is underwritten at $3.00. The costs of preparing the prospectus, legal fees, ASIC registration and other administrative costs add up to $800,000. The firm’s share price closes at $4.20 on its first day of trade. What is the total cost of the IPO. (4 marks)
c) Explain why venture capital funding is critical for start-up firms with a lot of intangible assets. (1 mark)
d) Discuss the problem of information asymmetry in venture capital funding. (1 mark)
For dollar amounts, give your answer to the nearest cent. For interest rates, give our answer as a percentage rounded to 2 decimal places.
2. An investor buys 1 share of ABC Ltd at the price of $30 on December 1, 2021. The firm is not expected to pay any dividends. Consider the following four possible scenarios for the share price on December 1, 2021
- $50 with a probability of 15%
- $34 with a probability of 55%
- $27 with a probability of 20%
- $20 with a probability of 10%
a) Calculate the expected return for holding the share for a year. (2 marks)
b) Calculate the variance of return and standard deviation of return. (3 marks)
c) On December 1, 2021, it turns out that the share is worth $37, and the investor also just received a dividend of $4. Calculate the total holding period return and capital gains return over the one-year period. (2 marks)
d) Discuss a benefit of portfolio diversification. Explain how to achieve this benefit. (2 marks)
e) “The standard deviation of a portfolio’s return can be reduced to zero by holding all the securities in the market.” True or false? Explain. (1 mark)
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