Your credit card shows a $600 debt liability. The interest rate is 24% pa, payable monthly. You can't pay any of the debt off, except in 6 months when it's your birthday and you'll receive $50 which you'll use to pay off the credit card. If that is your only repayment, how much will the credit card debt liability be one year from now?
One year ago you bought $100,000 of shares partly funded using a margin loan. The margin loan size was $70,000 and the other $30,000 was your own wealth or 'equity' in the share assets.
The interest rate on the margin loan was 7.84% pa.
Over the year, the shares produced a dividend yield of 4% pa and a capital gain of 5% pa.
What was the total return on your wealth? Ignore taxes, assume that all cash flows (interest payments and dividends) were paid and received at the end of the year, and all rates above are effective annual rates.
Hint: Remember that wealth in this context is your equity (E) in the house asset (V = D+E) which is funded by the loan (D) and your deposit or equity (E).
Question 432 option, option intrinsic value, no explanation
An American style call option with a strike price of ##K## dollars will mature in ##T## years. The underlying asset has a price of ##S## dollars.
What is an expression for the current intrinsic value in dollars from owning (being long) the American style call option? Note that the intrinsic value of an option does not subtract the premium paid to buy the option.
An investor owns a whole level of an old office building which is currently worth $1 million. There are three mutually exclusive projects that can be started by the investor. The office building level can be:
- Rented out to a tenant for one year at $0.1m paid immediately, and then sold for $0.99m in one year.
- Refurbished into more modern commercial office rooms at a cost of $1m now, and then sold for $2.4m when the refurbishment is finished in one year.
- Converted into residential apartments at a cost of $2m now, and then sold for $3.4m when the conversion is finished in one year.
All of the development projects have the same risk so the required return of each is 10% pa. The table below shows the estimated cash flows and internal rates of returns (IRR's).
| Mutually Exclusive Projects | |||
| Project | Cash flow now ($) |
Cash flow in one year ($) |
IRR (% pa) |
| Rent then sell as is | -900,000 | 990,000 | 10 |
| Refurbishment into modern offices | -2,000,000 | 2,400,000 | 20 |
| Conversion into residential apartments | -3,000,000 | 3,400,000 | 13.33 |
Which project should the investor accept?
What is the correlation of a variable X with itself?
The corr(X, X) or ##\rho_{X,X}## equals:
Question 657 systematic and idiosyncratic risk, CAPM, no explanation
A stock's required total return will decrease when its:
Use the below information to value a levered company with constant annual perpetual cash flows from assets. The next cash flow will be generated in one year from now, so a perpetuity can be used to value this firm. Both the operating and firm free cash flows are constant (but not equal to each other).
| Data on a Levered Firm with Perpetual Cash Flows | ||
| Item abbreviation | Value | Item full name |
| ##\text{OFCF}## | $100m | Operating free cash flow |
| ##\text{FFCF or CFFA}## | $112m | Firm free cash flow or cash flow from assets (includes interest tax shields) |
| ##g## | 0% pa | Growth rate of OFCF and FFCF |
| ##\text{WACC}_\text{BeforeTax}## | 7% pa | Weighted average cost of capital before tax |
| ##\text{WACC}_\text{AfterTax}## | 6.25% pa | Weighted average cost of capital after tax |
| ##r_\text{D}## | 5% pa | Cost of debt |
| ##r_\text{EL}## | 9% pa | Cost of levered equity |
| ##D/V_L## | 50% pa | Debt to assets ratio, where the asset value includes tax shields |
| ##t_c## | 30% | Corporate tax rate |
What is the value of the levered firm including interest tax shields?
Question 829 option, future, delta, gamma, theta, no explanation
Below are some statements about futures and European-style options on non-dividend paying stocks. Assume that the risk free rate is always positive. Which of these statements is NOT correct? All other things remaining equal:
A bank bill was bought for $99,000 and sold for $100,000 thirty (30) days later. There are 365 days in the year. Which of the following formulas gives the simple interest rate per annum over those 30 days?
Note: To help you identify which is the correct answer without doing any calculations yourself, the formulas used to calculate the numbers are given.
The market's expected total return is 10% pa and the risk free rate is 5% pa, both given as effective annual rates.
A stock has a beta of 0.7.
What do you think will be the stock's expected return over the next year, given as an effective annual rate?