Fight Finance

Assume that there exists a perfect world with no transaction costs, no asymmetric information, no taxes, no agency costs, equal borrowing rates for corporations and individual investors, the ability to short the risk free asset, semi-strong form efficient markets, the CAPM holds, investors are rational and risk-averse and there are no other market frictions.

For a firm operating in this perfect world, which statement(s) are correct?

(i) When a firm changes its capital structure and/or payout policy, share holders' wealth is unaffected.

(ii) When the idiosyncratic risk of a firm's assets increases, share holders do not expect higher returns.

(iii) When the systematic risk of a firm's assets increases, share holders do not expect higher returns.

Select the most correct response:

A project's net present value (NPV) is negative. Select the most correct statement.

Investors expect the Reserve Bank of Australia (RBA) to keep the policy rate steady at their next meeting.

Then unexpectedly, the RBA announce that they will increase the policy rate by 25 basis points due to fears that the economy is growing too fast and that inflation will be above their target rate of 2 to 3 per cent.

What do you expect to happen to Australia's exchange rate in the short term? The Australian dollar is likely to:

Bonds X and Y are issued by the same US company. Both bonds yield 6% pa, and they have the same face value ($100), maturity, seniority, and payment frequency.

The only difference is that bond X pays coupons of 8% pa and bond Y pays coupons of 12% pa. Which of the following statements is true?

A residential investment property has an expected nominal total return of 6% pa and nominal capital return of 3% pa.

Inflation is expected to be 2% pa. All rates are given as effective annual rates.

What are the property's expected real total, capital and income returns? The answer choices below are given in the same order.

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 instead, 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). Note that the perpetual cash flows are either the $20m from year 4 onwards, or the $60m from year 9 onwards after the additional $10m year 5 investment, but not both. 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?

What is the covariance of a variable X with itself?

The cov(X, X) or ##\sigma_{X,X}## equals:

A graph of assets’ expected returns ##(\mu)## versus standard deviations ##(\sigma)## is given in the graph below. The CML is the capital market line.

Which of the following statements about this graph, Markowitz portfolio theory and the Capital Asset Pricing Model (CAPM) theory is NOT correct?

Your supplier’s credit terms are "1/10 net 30". Which of the following statements about these credit terms is NOT correct?

If you intend to buy an item from your supplier for a tag price of $100 and you:

According to the impossible trinity, a currency can only have two of these three desirable traits: be fixed against the USD; convertible to and from USD for traders and investors so there are open goods, services and capital markets; and allow independent monetary policy set by the country’s central bank, independent of the US central bank.

Which of the following exchange rate regimes sacrifices fixing the exchange rate to the USD? In other words, which regime uses a floating exchange rate?