# Fight Finance

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A company selling charting and technical analysis software claims that independent academic studies have shown that its software makes significantly positive abnormal returns. Assuming the claim is true, which statement(s) are correct?

(I) Weak form market efficiency is broken.

(II) Semi-strong form market efficiency is broken.

(III) Strong form market efficiency is broken.

(IV) The asset pricing model used to measure the abnormal returns (such as the CAPM) had mis-specification error so the returns may not be abnormal but rather fair for the level of risk.

Select the most correct response:

You just signed up for a 30 year fully amortising mortgage loan with monthly payments of $1,500 per month. The interest rate is 9% pa which is not expected to change. To your surprise, you can actually afford to pay$2,000 per month and your mortgage allows early repayments without fees. If you maintain these higher monthly payments, how long will it take to pay off your mortgage?

Unrestricted negative gearing is allowed in Australia, New Zealand and Japan. Negative gearing laws allow income losses on investment properties to be deducted from a tax-payer's pre-tax personal income. Negatively geared investors benefit from this tax advantage. They also hope to benefit from capital gains which exceed the income losses.

For example, a property investor buys an apartment funded by an interest only mortgage loan. Interest expense is $2,000 per month. The rental payments received from the tenant living on the property are$1,500 per month. The investor can deduct this income loss of $500 per month from his pre-tax personal income. If his personal marginal tax rate is 46.5%, this saves$232.5 per month in personal income tax.

The advantage of negative gearing is an example of the benefits of:

Your poor friend asks to borrow some money from you. He would like $1,000 now (t=0) and every year for the next 5 years, so there will be 6 payments of$1,000 from t=0 to t=5 inclusive. In return he will pay you \$10,000 in seven years from now (t=7).

What is the net present value (NPV) of lending to your friend?

Assume that your friend will definitely pay you back so the loan is risk-free, and that the yield on risk-free government debt is 10% pa, given as an effective annual rate.

A timing option is best modeled as a or option?

Which of the following companies is most suitable for valuation using PE multiples techniques?

The first payment of a constant perpetual annual cash flow is received at time 5. Let this cash flow be $C_5$ and the required return be $r$.

So there will be equal annual cash flows at time 5, 6, 7 and so on forever, and all of the cash flows will be equal so $C_5 = C_6 = C_7 = ...$

When the perpetuity formula is used to value this stream of cash flows, it will give a value (V) at time:

The perpetuity with growth equation is:

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

Which of the following is NOT equal to the expected capital return as an effective annual rate?

High risk firms in danger of bankruptcy tend to have:

Arthur and Bindi are the only people on a remote island.

Luckily there are Coconut and Date palm trees on the island that grow delicious fruit. The problem is that harvesting the fruit takes a lot of work.

Arthur can pick 1 coconut per hour, 4 dates per hour or any linear combination of coconuts and dates. For example, he could pick 0.5 coconuts and 2 dates per hour.

Bindi can pick 2 coconuts per hour, 1 date per hour or any linear combination. For example, she could pick 0.5 coconuts and 0.75 dates per hour.

This information is summarised in the table and graph:

 Harvest Rates Per Hour Coconuts Dates Arthur 1 4 Bindi 2 1

Which of the following statements is NOT correct?