A firm has a debt-to-assets ratio of 50%. The firm then issues a large amount of debt to raise money for new projects of similar market risk to the company's existing projects. Assume a classical tax system. Which statement is correct?
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_\text{eff}-g_\text{eff}}###
Which expression is NOT equal to the expected capital return?
Question 338 market efficiency, CAPM, opportunity cost, technical analysis
A man inherits $500,000 worth of shares.
He believes that by learning the secrets of trading, keeping up with the financial news and doing complex trend analysis with charts that he can quit his job and become a self-employed day trader in the equities markets.
What is the expected gain from doing this over the first year? Measure the net gain in wealth received at the end of this first year due to the decision to become a day trader. Assume the following:
- He earns $60,000 pa in his current job, paid in a lump sum at the end of each year.
- He enjoys examining share price graphs and day trading just as much as he enjoys his current job.
- Stock markets are weak form and semi-strong form efficient.
- He has no inside information.
- He makes 1 trade every day and there are 250 trading days in the year. Trading costs are $20 per trade. His broker invoices him for the trading costs at the end of the year.
- The shares that he currently owns and the shares that he intends to trade have the same level of systematic risk as the market portfolio.
- The market portfolio's expected return is 10% pa.
Measure the net gain over the first year as an expected wealth increase at the end of the year.
Question 398 financial distress, capital raising, leverage, capital structure, NPV
A levered firm has zero-coupon bonds which mature in one year and have a combined face value of $9.9m.
Investors are risk-neutral and therefore all debt and equity holders demand the same required return of 10% pa.
In one year the firm's assets will be worth:
- $13.2m with probability 0.5 in the good state of the world, or
- $6.6m with probability 0.5 in the bad state of the world.
A new project presents itself which requires an investment of $2m and will provide a certain cash flow of $3.3m in one year.
The firm doesn't have any excess cash to make the initial $2m investment, but the funds can be raised from shareholders through a fairly priced rights issue. Ignore all transaction costs.
Should shareholders vote to proceed with the project and equity raising? What will be the gain in shareholder wealth if they decide to proceed?
Question 579 price gains and returns over time, time calculation, effective rate
How many years will it take for an asset's price to double if the price grows by 10% pa?
The price of gold is currently $700 per ounce. The forward price for delivery in 1 year is $800. An arbitrageur can borrow money at 10% per annum given as an effective discrete annual rate. Assume that gold is fairly priced and the cost of storing gold is zero.
What is the best way to conduct an arbitrage in this situation? The best arbitrage strategy requires zero capital, has zero risk and makes money straight away. An arbitrageur should sell 1 forward on gold and:
In the dividend discount model (DDM), share prices fall when dividends are paid. Let the high price before the fall be called the peak, and the low price after the fall be called the trough.
###P_0=\dfrac{C_1}{r-g}###
Which of the following statements about the DDM is NOT correct?
Question 894 balance of payments, current account, no explanation
Below are four graphs of Australia's external position, published in the RBA's chart pack.
Assume that all assets and liabilities are debt which makes interest income and equity which makes dividend income.
Which of the following statements is NOT correct? As at the end of 2017, Australia’s:
Question 920 SML, CAPM, Sharpe ratio, Treynor ratio, Jensens alpha, no explanation
Over-priced assets should NOT: