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.

A firm's weighted average cost of capital before tax (##r_\text{WACC before tax}##) would **increase** due to:

The following cash flows are expected:

- 10 yearly payments of $80, with the first payment in 3 years from now (first payment at t=3).
- 1 payment of $600 in 5 years and 6 months (t=5.5) from now.

What is the NPV of the cash flows if the discount rate is 10% given as an effective annual rate?

The following is the Dividend Discount Model used to price stocks:

### p_0=\frac{d_1}{r-g} ###

Which of the following statements about the Dividend Discount Model is **NOT** correct?

Your firm's research scientists can begin an exciting new project at a cost of $**10**m now, after which there’s a:

- 70% chance that cash flows will be $
**1**m per year forever, starting in 5 years (t=**5**). This is the A state of the world. - 20% chance that cash flows will be $
**3**m per year forever, starting in 5 years (t=**5**). This is the B state of the world. - 10% chance of a major break through in which case the cash flows will be $
**20**m per year forever starting in 5 years (t=**5**), or the project can be expanded by investing another $**10**m (at t=**5**) which is expected to give cash flows of $**60**m per year forever, starting at year 9 (t=**9**). This is the C state of the world.

The firm's cost of capital is **10**% pa.

What's the present value (at t=0) of the option to expand in year 5?

The below screenshot of Commonwealth Bank of Australia's (CBA) details were taken from the Google Finance website on 7 Nov 2014. Some information has been deliberately blanked out.

What was CBA's backwards-looking price-earnings ratio?

The perpetuity with growth formula, also known as the dividend discount model (DDM) or Gordon growth model, is appropriate for valuing a company's shares. ##P_0## is the current share price, ##C_1## is next year's expected dividend, ##r## is the total required return and ##g## is the expected growth rate of the dividend.

###P_0=\dfrac{C_1}{r-g}###

The below graph shows the expected future price path of the company's shares. Which of the following statements about the graph is **NOT** correct?

Mr Blue, Miss Red and Mrs Green are people with different utility functions. Which of the statements about the 3 utility functions is **NOT** correct?

**Question 865** option, Black-Scholes-Merton option pricing, no explanation

A **one** year European-style **call** option has a strike price of $**4**. The option's underlying stock pays no dividends and currently trades at $**5**. The risk-free interest rate is **10**% pa continuously compounded. Use the Black-Scholes-Merton formula to calculate the option price, assuming that the stock's standard deviation of continuously compounded returns is **47**% pa. The call option price now is: