A fairly priced stock has an expected return of 15% pa. Treasury bonds yield 5% pa and the market portfolio's expected return is 10% pa. What is the beta of the stock?

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:

Suppose you had $100 in a savings account and the interest rate was 2% per year.

After 5 years, how much do you think you would have in the account if you left the money to grow?

**Question 278** inflation, real and nominal returns and cash flows

Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year.

You just bought a nice dress which you plan to wear once per month on nights out. You bought it a moment ago for $600 (at t=0). In your experience, dresses used once per month last for 6 years.

Your younger sister is a student with no money and wants to borrow your dress once a month when she hits the town. With the increased use, your dress will only last for another 3 years rather than 6.

What is the present value of the cost of letting your sister use your current dress for the next 3 years?

Assume: that bank interest rates are 10% pa, given as an effective annual rate; you will buy a new dress when your current one wears out; your sister will only use the current dress, not the next one that you will buy; and the price of a new dress never changes.

**Question 442** economic depreciation, no explanation

A fairly valued share's current price is $**4** and it has a total required return of **30**%. Dividends are paid annually and next year's dividend is expected to be $1. After that, dividends are expected to grow by **5**% pa. All rates are effective annual returns.

What is the expected dividend cash flow, economic depreciation, and economic income and economic value added (EVA) that will be earned over the second year (from t=**1** to t=**2**) and paid at the end of that year (t=**2**)?

A firm is considering a business project which costs $**10**m now and is expected to pay a single cash flow of $**12.1**m in two years.

Assume that the initial $**10**m cost is funded using the firm's **existing cash** so no new equity or debt will be raised. The cost of capital is **10**% pa.

Which of the following statements about net present value (NPV), internal rate of return (IRR) and payback period is **NOT** correct?

A credit card company advertises an interest rate of 18% pa, payable monthly. Which of the following statements about the interest rate is **NOT** correct? All rates are given to four decimal places.

An equity index stands at **100** points and the one year equity futures price is **102**.

The equity index is expected to have a dividend yield of **4**% pa. Assume that investors are risk-neutral so their total required return on the shares is the same as the risk free Treasury bond yield which is **10**% pa. Both are given as discrete effective annual rates.

Assuming that the equity index is fairly priced, an arbitrageur would recognise that the equity futures are:

The famous investor Warren Buffet is one of few portfolio managers who appears to have consistently beaten the market. His company Berkshire Hathaway (BRK) appears to have outperformed the US S&P500 market index, shown in the graph below.

Read the below statements about Warren Buffet and the implications for the Efficient Markets Hypothesis (EMH) theory of Eugene Fama. Assume that the first sentence is true. Analyse the second sentence and select the answer option which is **NOT** correct. In other words, find the false statement in the second sentence.