# Fight Finance

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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 $10 dividend every year after that forever. The required return of the stock is 10% pa. Would you like to the share or politely ? A firm's weighted average cost of capital before tax ($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$10m now, after which there’s a:

• 70% chance that cash flows will be $1m per year forever, starting in 5 years (t=5). This is the A state of the world. • 20% chance that cash flows will be$3m 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 $20m per year forever starting in 5 years (t=5), or the project can be expanded by investing another$10m (at t=5) which is expected to give cash flows of $60m 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? You are owed money. Are you a or a ? 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? A one year European-style call option has a strike price of$4.

The option's underlying stock currently trades at \$5, pays no dividends and its standard deviation of continuously compounded returns is 47% pa.

The risk-free interest rate is 10% pa continuously compounded.

Use the Black-Scholes-Merton formula to calculate the option price. The call option price now is: