Ldquoif the efficient-market hypothesis is true the pension

Question

Question1.

• “If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio with a pin.” Explain why this is not the case. 

Question2.

• Dill Ltd current share price is $20 and it has just paid a $2.50 dividend. Dividends of Dill are expected to grow at the rate of 6% per year.
• What is an estimated return that shareholders of Dill expect to earn?
• Dill Ltd also has preference share outstanding that pays fixed dividend of $2 per share. If preference stock is currently priced at $16, what is the return that preference share holders expect to earn?
• Five years ago Dill Ltd issued 13 year bond with face value of $1000 and coupon rate of 7.5% p.a. The price of these bonds is currently $950. What is Dill’s relevant cost of debt?
• Dill has a 12% Bank loan and the current outstanding balance on the loan is $12,000,000, interest on the loan is compounded monthly.
• Dill Ltd has 5000,000 ordinary shares outstanding and 1,500,000 preference shares outstanding, and its equity has a total book value of $50,000,000. Its liability has a book value of $25,000,000. If Dill’s ordinary and preference shares are priced as in parts (A) and (B) above, what is the market value of Dill’s assets?
• What is Dill’s weighted average cost of capital (WACC)
• Tax rate is 30%.