Fight Finance

Question 109  credit rating, credit risk

Bonds with lower (worse) credit ratings tend to have:

(a) Lower yields to maturity.

(b) Higher probabilities of default.

(c) Lower coupon rates when priced at par.

(d) Lower total risk.

(e) Lower credit risk.

Question 208  CFFA

Find UniBar Corp's Cash Flow From Assets (CFFA), also known as Free Cash Flow to the Firm (FCFF), over the year ending 30th June 2013.

UniBar Corp
Income Statement for
year ending 30th June 2013
	$m
Sales	80
COGS	40
Operating expense	15
Depreciation	10
Interest expense	5
Income before tax	10
Tax at 30%	3
Net income	7

UniBar Corp
Balance Sheet
as at 30th June	2013	2012
	$m	$m
Assets
Current assets	120	90
PPE
Cost	360	320
Accumul. depr.	40	30
Carrying amount	320	290
Total assets	440	380
Liabilities
Current liabilities	110	60
Non-current liabilities	190	180
Owners' equity
Retained earnings	95	95
Contributed equity	45	45
Total L and OE	440	380

 

Note: all figures are given in millions of dollars ($m).

(a) 12

(b) 2

(c) -8

(d) -18

(e) 48

Question 305  option, short selling, speculation

You believe that the price of a share will fall significantly very soon, but the rest of the market does not. The market thinks that the share price will remain the same. Assuming that your prediction will soon be true, which of the following trades is a bad idea? In other words, which trade will NOT make money or prevent losses?

(a) Sell all existing stock that you own.

(b) Short sell the stock.

(c) Buy put options on the stock.

(d) Sell put options on the stock.

(e) Sell call options on the stock.

Question 331  DDM, income and capital returns

The following equation is the Dividend Discount Model, also known as the 'Gordon Growth Model' or the 'Perpetuity with growth' equation.

### p_0= \frac{c_1}{r-g} ###

Which expression is equal to the expected dividend return?

(a) ##(c_1/p_0 ) -1##

(b) ##(p_1/p_0) -1##

(c) ##(c_5/c_4) -1##

(d) ##c_3/p_2##

(e) ##(p_1-p_0)/p_0##

Question 382  Merton model of corporate debt, real option, option

In the Merton model of corporate debt, buying a levered company's shares is equivalent to:

(a) Buying the company's assets.

(b) Buying a call option on the company's assets.

(c) Buying a put option on the company's assets.

(d) Buying the company's assets and buying a call option on those assets.

(e) Buying the company's assets and buying a put option on those assets.

Question 613  debt terminology

You own a debt asset. Are you a or a ?

Question 660  fully amortising loan, interest only loan, APR

How much more can you borrow using an interest-only loan compared to a 25-year fully amortising loan if interest rates are 6% pa compounding per month and are not expected to change? If it makes it easier, assume that you can afford to pay $2,000 per month on either loan. Express your answer as a proportional increase using the following formula:

###\text{Proportional Increase} = \dfrac{V_\text{0,interest only}}{V_\text{0,fully amortising}} - 1###

(a) 77.6034%

(b) 30.3779%

(c) 28.8603%

(d) 22.3966%

(e) 7.5304%

Question 664  real and nominal returns and cash flows, inflation, no explanation

What is the present value of real payments of $100 every year forever, with the first payment in one year? The nominal discount rate is 7% pa and the inflation rate is 4% pa.

(a) $3,466.6667

(b) $3,333.3333

(c) $3,205.1282

(d) $1,485.7143

(e) $1,428.5714

Question 859  money supply, no explanation

The below table shows Australian monetary aggregates. Note that ‘M3’ is the sum of all the figures in the table and ‘ADI’ stands for Authorised Deposit-taking Institution such as a bank, building society or credit union.

Australian Monetary Aggregates
March 2017, AUD billions
Currency	Current deposits with banks	Certificates of deposit issued by banks	Term deposits with banks	Other deposits with banks	Deposits with non-bank ADIs	M3
69.3	271.6	207.2	562.3	838.7	36.9	1986.0

 

Source: RBA Statistical Table D3 Monetary Aggregates.

Which of the following statements is NOT correct?

(a) Current deposits are the notes and coins that banks keep in their physical vaults and Automatic Teller Machines (ATM’s).

(b) Current deposits with banks pay little interest to depositors but are highly liquid since they can be withdrawn using ATM’s.

(c) The government directly controls the amount of notes and coins.

(d) The central bank indirectly controls the amount of deposits by changing the cash rate.

(e) When a commercial bank lends money to a borrower to buy a house, that money is likely to be deposited by the house seller into another bank.

Question 865  option, Black-Scholes-Merton option pricing

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:

(a) $0.287263739

(b) $0.398141032

(c) $1.142227853

(d) $1.667914067

(e) $2.193600281