Fight Finance

Question 110  CAPM, SML, NPV

The security market line (SML) shows the relationship between beta and expected return.

Buying investment projects that plot above the SML would lead to:

(a) A positive NPV.

(b) A zero NPV.

(c) A negative NPV.

(d) A large amount of diversifiable risk.

(e) Zero diversifiable risk.

Question 235  SML, NPV, CAPM, risk

The security market line (SML) shows the relationship between beta and expected return.

Investment projects that plot on the SML would have:

(a) A positive NPV and should be accepted.

(b) A zero NPV.

(c) A negative NPV and should be rejected.

(d) A large amount of diversifiable risk.

(e) Zero diversifiable risk.

Question 264  DDM

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

###P_0=\frac{d_1}{r-g}###

A stock pays dividends annually. It just paid a dividend, but the next dividend (##d_1##) will be paid in one year.

According to the DDM, what is the correct formula for the expected price of the stock in 2.5 years?

(a) ##P_{2.5}=P_0 (1+g)^{2.5} ##

(b) ##P_{2.5}=P_0 (1+r)^{2.5} ##

(c) ##P_{2.5}=P_0 (1+g)^2 (1+r)^{0.5} ##

(d) ##P_{2.5}=P_0 (1+r)^2 (1+g)^{0.5} ##

(e) ##P_{2.5}=P_0 (1+r)^3 (1+g)^{-0.5} ##

Question 515  corporate financial decision theory, idiom

The expression 'you have to spend money to make money' relates to which business decision?

(a) Investment decision.

(b) Financing decision.

(c) Working capital decision.

(d) Payout policy decision.

(e) Diversification decision.

Question 530  Annuity, annuity due, no explanation

You are promised 20 payments of $100, where the first payment is immediate (t=0) and the last is at the end of the 19th year (t=19). The effective annual discount rate is ##r##.

Which of the following equations does NOT give the correct present value of these 20 payments?

(a) ##V_0=\dfrac{\dfrac{100}{r} \left( 1- \dfrac{1}{(1+r)^{20}} \right) }{(1+r)^1} ##

(b) ##V_0=\dfrac{100}{r} \left( 1- \dfrac{1}{(1+r)^{20}} \right) (1+r)^1##

(c) ##V_0=\dfrac{100}{r} \left( 1- \dfrac{1}{(1+r)^{19}} \right) +100##

(d) ##V_0=\dfrac{100(1+r)^1}{r} \left( 1- \dfrac{1}{(1+r)^{20}} \right) ##

(e) ##V_0=100 \left( 1-(1+r)^{-19} \right) r^{-1}+100##

Question 603  foreign exchange rate, American and European terms

Vietnamese people usually quote the Vietnamese Dong in VND per 1 USD. For example, in October 2015 the Vietnamese Dong was 22,300 VND per USD. Is this an or terms quote?

Question 650  future, closing out future contract

In February a company sold one December 40,000 pound (about 18 metric tons) lean hog futures contract. It closed out its position in May.

The spot price was $0.68 per pound in February. The December futures price was $0.70 per pound when the trader entered into the contract in February, $0.60 when he closed out his position in May, and $0.55 when the contract matured in December.

What was the total profit?

(a) $2,000

(b) $3,200

(c) $4,000

(d) $5,200

(e) $6,000

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 817  expected and historical returns, income and capital returns

Over the last year, a constant-dividend-paying stock's price fell, while it's future expected dividends and profit remained the same. Assume that:

• Now is ##t=0##, last year is ##t=-1## and next year is ##t=1##;
• The dividend is paid at the end of each year, the last dividend was just paid today ##(C_0)## and the next dividend will be paid next year ##(C_1)##;
• Markets are efficient and the dividend discount model is suitable for valuing the stock.

Which of the following statements is NOT correct? The stock's:

(a) Historical capital return last year was negative ##\left( \dfrac{P_0 - P_{-1}}{P_{-1}} < 0 \right)##.

(b) Historical dividend yield last year was negative ##\left( \dfrac{C_0}{P_{-1}} < 0 \right)##.

(c) Expected future capital return next year is positive ##\left( \dfrac{P_1 - P_0}{P_0} > 0 \right)##.

(d) Expected future dividend yield next year is positive ##\left( \dfrac{C_1}{P_0} > 0 \right)##.

(e) Expected future total return next year is positive ##\left( \dfrac{P_1 - P_0 + C_1}{P_0} > 0 \right)##.

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.