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.
Question 56 income and capital returns, bond pricing, premium par and discount bonds
Which of the following statements about risk free government bonds is NOT correct?
Hint: Total return can be broken into income and capital returns as follows:
###\begin{aligned} r_\text{total} &= \frac{c_1}{p_0} + \frac{p_1-p_0}{p_0} \\ &= r_\text{income} + r_\text{capital} \end{aligned} ###
The capital return is the growth rate of the price.
The income return is the periodic cash flow. For a bond this is the coupon payment.
A share was bought for $30 (at t=0) and paid its annual dividend of $6 one year later (at t=1).
Just after the dividend was paid, the share price fell to $27 (at t=1). What were the total, capital and income returns given as effective annual rates?
The choices are given in the same order:
##r_\text{total}## , ##r_\text{capital}## , ##r_\text{dividend}##.
Question 545 income and capital returns, fully amortising loan, no explanation
Which of the following statements about the capital and income returns of a 25 year fully amortising loan asset is correct?
Assume that the yield curve (which shows total returns over different maturities) is flat and is not expected to change.
Over the 25 years from issuance to maturity, a fully amortising loan's expected annual effective:
Question 546 income and capital returns, interest only loan, no explanation
Which of the following statements about the capital and income returns of an interest-only loan is correct?
Assume that the yield curve (which shows total returns over different maturities) is flat and is not expected to change.
An interest-only loan's expected:
How much more can you borrow using an interest-only loan compared to a 25-year fully amortising loan if interest rates are 6% pa compounding per month and are not expected to change? If it makes it easier, assume that you can afford to pay $2,000 per month on either loan. Express your answer as a proportional increase using the following formula:
###\text{Proportional Increase} = \dfrac{V_\text{0,interest only}}{V_\text{0,fully amortising}} - 1###A trader just bought a European style put option on CBA stock. The current option premium is $2, the exercise price is $75, the option matures in one year and the spot CBA stock price is $74.
Which of the following statements is NOT correct?
Question 768 accounting terminology, book and market values, no explanation
Accountants and finance professionals have lots of names for the same things which can be quite confusing.
Which of the following groups of items are NOT synonyms?
Use the below information to value a levered company with constant annual perpetual cash flows from assets. The next cash flow will be generated in one year from now, so a perpetuity can be used to value this firm. Both the operating and firm free cash flows are constant (but not equal to each other).
Data on a Levered Firm with Perpetual Cash Flows | ||
Item abbreviation | Value | Item full name |
##\text{OFCF}## | $48.5m | Operating free cash flow |
##\text{FFCF or CFFA}## | $50m | Firm free cash flow or cash flow from assets |
##g## | 0% pa | Growth rate of OFCF and FFCF |
##\text{WACC}_\text{BeforeTax}## | 10% pa | Weighted average cost of capital before tax |
##\text{WACC}_\text{AfterTax}## | 9.7% pa | Weighted average cost of capital after tax |
##r_\text{D}## | 5% pa | Cost of debt |
##r_\text{EL}## | 11.25% pa | Cost of levered equity |
##D/V_L## | 20% pa | Debt to assets ratio, where the asset value includes tax shields |
##t_c## | 30% | Corporate tax rate |
What is the value of the levered firm including interest tax shields?
When does a European option's last-traded market price become a sunk cost?