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 risk to the company's existing projects. Assume a classical tax system. Which statement is correct?

A project has the following cash flows:

Project Cash Flows | |

Time (yrs) | Cash flow ($) |

0 | -400 |

1 | 0 |

2 | 500 |

The required return on the project is 10%, given as an effective annual rate.

What is the Internal Rate of Return (IRR) of this project? The following choices are effective annual rates. Assume that the cash flows shown in the table are paid all at once at the given point in time.

Harvey Norman the large retailer often runs sales advertising 2 years **interest free** when you purchase its products. This offer can be seen as a free personal loan from Harvey Norman to its customers.

Assume that banks charge an interest rate on personal loans of 12% pa given as an APR compounding per month. This is the interest rate that Harvey Norman deserves on the 2 year loan it extends to its customers. Therefore Harvey Norman must implicitly include the cost of this loan in the advertised sale price of its goods.

If you were a customer buying from Harvey Norman, and you were paying immediately, not in 2 years, what is the minimum percentage discount to the advertised sale price that you would insist on? (Hint: if it makes it easier, assume that you’re buying a product with an advertised price of $100).

When using the dividend discount model, care must be taken to avoid using a nominal dividend growth rate that exceeds the country's nominal GDP growth rate. Otherwise the firm is forecast to take over the country since it grows faster than the average business forever.

Suppose a firm's nominal dividend grows at **10**% pa forever, and nominal GDP growth is **5**% pa forever. The firm's total dividends are currently $**1** billion (t=0). The country's GDP is currently $**1,000** billion (t=0).

In approximately how many years will the company's total dividends be as large as the country's GDP?

**Question 335** foreign exchange rate, American and European terms

Investors expect Australia's central bank, the RBA, to reduce the policy rate at their next meeting due to fears that the economy is slowing. Then unexpectedly, the policy rate is actually kept unchanged.

What do you expect to happen to Australia's exchange rate?

**Question 580** price gains and returns over time, time calculation, effective rate

How many years will it take for an asset's price to **quadruple** (be four times as big, say from $1 to $4) if the price grows by **15**% pa?

Which of the following statements about futures contracts on shares is **NOT** correct, assuming that markets are efficient?

When an equity future is first negotiated (at t=0):

**Question 891** foreign exchange rate, monetary policy, no explanation

Suppose the market expects the Bank of Japan (BoJ) to **decrease** their short term interest rate by 15 basis points at their next meeting. The current short term interest rate is -0.1% pa and the exchange rate is 100 JPY per USD.

Then unexpectedly, the BoJ announce that they will leave the short term interest rate **unchanged**.

What do you expect to happen to Japan’s exchange rate on the day when the surprise announcement is made? The Japanese Yen (JPY) is likely to suddenly: