A company runs a number of slaughterhouses which supply hamburger meat to McDonalds. The company is afraid that live cattle prices will increase over the next year, even though there is widespread belief in the market that they will be stable. What can the company do to hedge against the risk of increasing live cattle prices? Which statement(s) are correct?
(i) buy call options on live cattle.
(ii) buy put options on live cattle.
(iii) sell call options on live cattle.
Select the most correct response:
In these tough economic times, central banks around the world have cut interest rates so low that they are practically zero. In some countries, government bond yields are also very close to zero.
A three year government bond with a face value of $100 and a coupon rate of 2% pa paid semi-annually was just issued at a yield of 0%. What is the price of the bond?
Question 455 income and capital returns, payout policy, DDM, market efficiency
A fairly priced unlevered firm plans to pay a dividend of $1 next year (t=1) which is expected to grow by 3% pa every year after that. The firm's required return on equity is 8% pa.
The firm is thinking about reducing its future dividend payments by 10% so that it can use the extra cash to invest in more projects which are expected to return 8% pa, and have the same risk as the existing projects. Therefore, next year's dividend will be $0.90. No new equity or debt will be issued to fund the new projects, they'll all be funded by the cut in dividends.
What will be the stock's new annual capital return (proportional increase in price per year) if the change in payout policy goes ahead?
Assume that payout policy is irrelevant to firm value (so there's no signalling effects) and that all rates are effective annual rates.
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 approximate payout ratio over the 2014 financial year?
Note that the firm's interim and final dividends were $1.83 and $2.18 respectively over the 2014 financial year.
Question 558 portfolio weights, portfolio return, short selling
An investor wants to make a portfolio of two stocks A and B with a target expected portfolio return of 16% pa.
- Stock A has an expected return of 8% pa.
- Stock B has an expected return of 12% pa.
What portfolio weights should the investor have in stocks A and B respectively?
Short selling is a way to make money from falling prices. In what order must the following steps be completed to short-sell an asset? Let Tom, Dick and Harry be traders in the share market.
- Step P: Purchase the asset from Harry.
- Step G: Give the asset to Tom.
- Step W: Wait and hope that the asset price falls.
- Step B: Borrow the asset from Tom.
- Step S: Sell the asset to Dick.
Select the statement with the correct order of steps.
Question 858 indirect security, intermediated finance, no explanation
Which of the following transactions involves an ‘indirect security’ using a ‘financial intermediary’?