**Question 121** capital structure, leverage, financial distress, interest tax shield

Fill in the missing words in the following sentence:

All things remaining equal, as a firm's amount of debt funding falls, benefits of interest tax shields __________ and the costs of financial distress __________.

A wholesale store offers credit to its customers. Customers are given 60 days to pay for their goods, but if they pay immediately they will get a 1.5% discount.

What is the effective interest rate implicit in the discount being offered? Assume 365 days in a year and that all customers pay either immediately or the 60th day. All of the below answer choices are given as effective annual interest rates.

A project has the following cash flows. Normally cash flows are assumed to happen at the given time. But here, assume that the cash flows are received smoothly over the year. So the $250 at time 2 is actually earned smoothly from t=1 to t=2:

Project Cash Flows | |

Time (yrs) | Cash flow ($) |

0 | -400 |

1 | 200 |

2 | 250 |

What is the payback period of the project in years?

**Question 322** foreign exchange rate, monetary policy, American and European terms

The market expects the Reserve Bank of Australia (RBA) to decrease the policy rate by 25 basis points at their next meeting.

Then unexpectedly, the RBA announce that they will decrease the policy rate by 50 basis points due to fears of a recession and deflation.

What do you expect to happen to Australia's exchange rate? The Australian dollar will:

One of the reasons why firms may not begin projects with relatively small positive net present values (NPV's) is because they wish to maximise the value of their:

A company advertises an investment costing $**1,000** which they say is underpriced. They say that it has an expected total return of **15**% pa, but a required return of only **10**% pa. Of the **15**% pa total expected return, the dividend yield is expected to always be **7**% pa and rest is the capital yield.

Assuming that the company's statements are correct, what is the NPV of buying the investment if the **15**% total return lasts for the next 100 years (t=0 to 100), then reverts to **10**% after that time? Also, what is the NPV of the investment if the 15% return lasts forever?

In both cases, assume that the required return of 10% remains constant, the dividends can only be re-invested at **10**% pa and all returns are given as effective annual rates.

The answer choices below are given in the same order (15% for 100 years, and 15% forever):

Which one of the below option and futures contracts gives the possibility of potentially unlimited gains?

**Question 890** foreign exchange rate, monetary policy, no explanation

The market expects the Reserve Bank of Australia (RBA) to **increase** the policy rate by **25** basis points at their next meeting. The current exchange rate is **0.8** USD per AUD.

Then unexpectedly, the RBA announce that they will increase the policy rate by **50** basis points due to increased fears of inflation.

What do you expect to happen to Australia's exchange rate on the day when the surprise announcement is made? The Australian dollar is likely to suddenly:

**Question 988** variance, covariance, beta, CAPM, risk, no explanation

Price Data Time Series |
|||||||||||

Sourced from Yahoo Finance Historical Price Data | |||||||||||

Date | S&P500 Index (^GSPC) | Apple (AAPL) | |||||||||

Open | High | Low | Close | Adj close | Open | High | Low | Close | Adj close | ||

2007, Wed 3 Jan | 1418 | 1429 | 1408 | 1417 | 1417 | 12.33 | 12.37 | 11.7 | 11.97 | 10.42 | |

2008, Wed 2 Jan | 1468 | 1472 | 1442 | 1447 | 1447 | 28.47 | 28.61 | 27.51 | 27.83 | 24.22 | |

2009, Fri 2 Jan | 903 | 935 | 899 | 932 | 932 | 12.27 | 13.01 | 12.17 | 12.96 | 11.28 | |

2010, Mon 4 Jan | 1117 | 1134 | 1117 | 1133 | 1133 | 30.49 | 30.64 | 30.34 | 30.57 | 26.6 | |

Source: Yahoo Finance. | |||||||||||

Which of the following statements about the above table which is used to calculate Apple's equity beta is **NOT** correct?