Question Three Moots are a US based firm manufacturing titanium bicycle frames. They have both preference and ordinary s

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Question Three Moots Are A Us Based Firm Manufacturing Titanium Bicycle Frames They Have Both Preference And Ordinary S 1 (72.56 KiB) Viewed 43 times

Question Three Moots are a US based firm manufacturing titanium bicycle frames. They have both preference and ordinary shares in issue on the New York Stock Exchange. Moots' financial statements as of October 2019 report earnings of $195m, of which $100m will be paid in dividends to their ordinary shareholders at the end of the year. Moots have 12m ordinary shares in issue. Dividend payments are expected to grow at a rate of 5% per annum (therefore, the dividend payment at the end of 2020 will be the dividend payment in 2019 multiplied by 1 plus dividend growth rate (1+9)) for the next 5 years. From year 6 onwards, dividend growth is expected to rise to 6% per annum indefinitely The required rate of return demanded by investors is 10% per annum Preference shares issued by Moots have a notional value of $1.00 with a 6.55% dividend rate and the discount rate associated to preference shares is 2.95%. 6 Required: a) Calculate the price of Moots' ordinary shares on the New York Stock Exchange, then compute the price to earnings ratio for the ordinary share. [25 marks) b) Calculate the price of Moots' preference shares on the New York Stock Exchange [5 marks] c) Discuss how each form of market efficiency would influence the price of Moots' stocks in response to historical information, new public information, and private information 125 marks) a) Calculate the price of a 6-month at-the-money call and put option on Moot's ordinary stock. You may ignore dividend payments made by Moot's stock in your calculation of the call and put prices and assume the following data: Ri= 1.76% per annum, o = 9% per annum, t = 0.5 years. Hint: an at the money call option has a strike price the same as the current stock price [45 marks)