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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 __________.

Question 221 credit risk

You're considering making an investment in a particular company. They have preference shares, ordinary shares, senior debt and junior debt.

Which is the safest investment? Which has the highest expected returns?

Question 330 APR, effective rate, debt terminology

Which of the following statements about effective rates and annualised percentage rates (APR's) is NOT correct?

(a) Effective rates compound once over their time period. So an effective monthly rate compounds once per month.

(b) APR's compound more than once per year. So an APR compounding monthly compounds 12 times per year. The exception is an APR that compounds annually (once per year) which is the same thing as an effective annual rate.

(c) To convert an effective rate to an APR, multiply the effective rate by the number of time periods in one year. So an effective monthly rate multiplied by 12 is equal to an APR compounding monthly.

(d) To convert an APR compounding monthly to an effective monthly rate, divide the APR by the number of months in one year (12).

(e) To convert an APR compounding monthly to an effective weekly rate, divide the APR by the number of weeks in one year (approximately 52).

Question 343 CFFA, capital budgeting

An old company's Firm Free Cash Flow (FFCF, same as CFFA) is forecast in the graph below.

To value the firm's assets, the terminal value needs to be calculated using the perpetuity with growth formula:

###V_{\text{terminal, }t-1} = \dfrac{FFCF_{\text{terminal, }t}}{r-g}###

Which point corresponds to the best time to calculate the terminal value?

Question 443 corporate financial decision theory, investment decision, financing decision, working capital decision, payout policy

Business people make lots of important decisions. Which of the following is the most important long term decision?

Question 503 DDM, NPV, stock pricing

A share currently worth $100 is expected to pay a constant dividend of $4 for the next 5 years with the first dividend in one year (t=1) and the last in 5 years (t=5).

The total required return is 10% pa.

What do you expected the share price to be in 5 years, just after the dividend at that time has been paid?

Question 533 NPV, no explanation

You have $100,000 in the bank. The bank pays interest at 10% pa, given as an effective annual rate.

You wish to consume twice as much now (t=0) as in one year (t=1) and have nothing left in the bank at the end.

How much can you consume at time zero and one? The answer choices are given in the same order.

Question 578 inflation, real and nominal returns and cash flows

Which of the following statements about inflation 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:

(a) Trade surplus was roughly zero, so Australians exported as much as they imported.

(b) Net Income was negative, so Australians paid more dividends and interest to foreigners than they received. This is probably because Australia has greater gross foreign liabilities than gross foreign assets.

(c) Current account deficit means Australians have to lend to foreigners by buying foreigners’ debt and equity which represent net capital outflows out of Australia.

(d) Net foreign equity liabilities were negative (less than zero) so Australians had positive net foreign equity assets which means that Australians owned more foreign shares than foreigners owned of Australian shares.

(e) Persistent current account deficit will make its net foreign liabilities greater and greater.

Question 948 VaR, expected shortfall

Below is a historical sample of returns on the S&P500 capital index.

S&P500 Capital Index Daily Returns Ranked from Best to Worst
10,000 trading days from 4th August 1977 to 24 March 2017 based on closing prices.
Rank	Date (DD-MM-YY)	Continuously compounded daily return (% per day)
1	21-10-87	9.23
2	08-03-83	8.97
3	13-11-08	8.3
4	30-09-08	8.09
5	28-10-08	8.01
6	29-10-87	7.28
…	…	…
9980	11-12-08	-5.51
9981	22-10-08	-5.51
9982	08-08-11	-5.54
9983	22-09-08	-5.64
9984	11-09-86	-5.69
9985	30-11-87	-5.88
9986	14-04-00	-5.99
9987	07-10-98	-6.06
9988	08-01-88	-6.51
9989	27-10-97	-6.55
9990	13-10-89	-6.62
9991	15-10-08	-6.71
9992	29-09-08	-6.85
9993	07-10-08	-6.91
9994	14-11-08	-7.64
9995	01-12-08	-7.79
9996	29-10-08	-8.05
9997	26-10-87	-8.4
9998	31-08-98	-8.45
9999	09-10-08	-12.9
10000	19-10-87	-23.36

Mean of all 10,000:		0.0354
Sample standard deviation of all 10,000:		1.2062
Sources: Bloomberg and S&P.

Assume that the one-tail Z-statistic corresponding to a probability of 99.9% is exactly 3.09. Which of the following statements is NOT correct? Based on the historical data, the 99.9% daily: