Fight Finance

Question 10  DDM

For a price of $95, Sherylanne will sell you a share which is expected to pay its first dividend of $10 in 7 years (t=7), and will continue to pay the same $10 dividend every year after that forever.

The required return of the stock is 10% pa.

Would you like to the share or politely ?

Question 293  covariance, correlation, portfolio risk

All things remaining equal, the higher the correlation of returns between two stocks:

(a) The more diversification is possible when those stocks are combined in a portfolio.

(b) The lower the variance of returns of an equally-weighted portfolio of those stocks.

(c) The lower the volatility of returns of an equal-weighted portfolio of those stocks.

(d) The higher the covariance between those stocks' returns.

(e) The more likely that when one stock has a positive return, the other has a negative return.

Question 298  interest only loan

A prospective home buyer can afford to pay $2,000 per month in mortgage loan repayments. The central bank recently lowered its policy rate by 0.25%, and residential home lenders cut their mortgage loan rates from 4.74% to 4.49%.

How much more can the prospective home buyer borrow now that interest rates are 4.49% rather than 4.74%? Give your answer as a proportional increase over the original amount he could borrow (##V_\text{before}##), so:

###\text{Proportional increase} = \frac{V_\text{after}-V_\text{before}}{V_\text{before}} ###

Assume that:

• Interest rates are expected to be constant over the life of the loan.

• Loans are interest-only and have a life of 30 years.

• Mortgage loan payments are made every month in arrears and all interest rates are given as annualised percentage rates compounding per month.

(a) 0.055679

(b) 0.029631

(c) 0.029547

(d) 0.006245

(e) 0.0025

Question 359  CFFA

Which one of the following will have no effect on net income (NI) but decrease cash flow from assets (CFFA or FFCF) in this year for a tax-paying firm, all else remaining constant?

Remember:

###NI=(Rev-COGS-FC-Depr-IntExp).(1-t_c )### ###CFFA=NI+Depr-CapEx - ΔNWC+IntExp###

(a) An increase in revenue (Rev).

(b) An increase in rent expense (a type of recurring fixed cost, FC).

(c) An increase in depreciation expense (Depr).

(d) An increase in inventories (a current asset).

(e) An decrease in interest expense (IntExp).

Question 411  WACC, capital structure

A firm plans to issue equity and use the cash raised to pay off its debt. No assets will be bought or sold. Ignore the costs of financial distress.

Which of the following statements is NOT correct, all things remaining equal?

(a) The firm's WACC before tax will rise.

(b) The firm's WACC after tax will rise.

(c) The firm's required return on equity will be lower.

(d) The firm's net income will be higher.

(e) The firm's free cash flow will be lower.

Question 476  income and capital returns, idiom

The saying "buy low, sell high" suggests that investors should make a:

(a) Positive income return.

(b) Positive capital return.

(c) Negative income return.

(d) Negative capital return.

(e) Positive total return.

Question 715  return distribution

If a variable, say X, is normally distributed with mean ##\mu## and variance ##\sigma^2## then mathematicians write ##X \sim \mathcal{N}(\mu, \sigma^2)##.

If a variable, say Y, is log-normally distributed and the underlying normal distribution has mean ##\mu## and variance ##\sigma^2## then mathematicians write ## Y \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##.

The below three graphs show probability density functions (PDF) of three different random variables Red, Green and Blue.

Select the most correct statement:

(a)##Red \sim \mathcal{N}(\mu, \sigma^2)##,   ##Green \sim \mathcal{N}(\mu, \sigma^2)##   and   ##Blue \sim \mathcal{N}(\mu, \sigma^2)##

(b) ##Red \sim \mathcal{N}(\mu, \sigma^2)##,   ##Green \sim \mathcal{N}(\mu, \sigma^2)##   and   ##Blue \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##

(c) ##Red \sim \mathcal{N}(\mu, \sigma^2)##,   ##Green \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##   and   ##Blue \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##

(d) ##Red \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##,   ##Green \sim \mathcal{N}(\mu, \sigma^2)##   and   ##Blue \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##

(e) ##Red \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##,   ##Green \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##   and   ##Blue \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##

Question 958  confidence interval, normal distribution

A stock's returns are normally distributed with a mean of 8% pa and a standard deviation of 15 percentage points pa. What is the 99% confidence interval of returns over the next year? Note that the Z-statistic corresponding to a one-tail:

• 90% normal probability density function is 1.282.
• 95% normal probability density function is 1.645.
• 97.5% normal probability density function is 1.960.
• 99% normal probability density function is 2.326.
• 99.5% normal probability density function is 2.576

The 99% confidence interval of annual returns is between:

(a) 61.52% and -61.52% pa.

(b) 56.52% and -36.52% pa.

(c) 51.52% and -51.52% pa.

(d) 46.64% and -30.64% pa.

(e) 30% and -10% pa.

Question 974  foreign exchange rate, monetary policy, no explanation

Suppose the market expects the Bank of Japan (BoJ) to increase their short term interest rate by 15 basis points at their next meeting. The current short term interest rate is -0.1% pa and the exchange rate is 100 JPY per USD.

As expected, the BoJ announce that they will increase short term interest rate by 15 basis points.

What do you expect to happen to Japan’s exchange rate on the day when the announcement is made? The Japanese Yen (JPY) is likely to:

(a) Remain at 100 JPY per USD.

(b) Appreciate against the USD to be, say, 101 JPY per USD.

(c) Appreciate against the USD to be, say, 99 JPY per USD.

(d) Depreciate against the USD to be, say, 101 JPY per USD.

(e) Depreciate against the USD to be, say, 99 JPY per USD.

Question 986  initial public offering, capital raising

In an initial public offering (IPO), a:

(a) Sole trader turns into a partnership.

(b) Partnership turns into a private company.

(c) Private company turns into a public company.

(d) Public company turns into a private company.

(e) Private company turns into a sole trader.