A stock was bought for $8 and paid a dividend of $0.50 one year later (at t=1 year). Just after the dividend was paid, the stock price was $7 (at t=1 year).
What were the total, capital and dividend returns given as effective annual rates? The choices are given in the same order:
##r_\text{total}##, ##r_\text{capital}##, ##r_\text{dividend}##.
The following equation is the Dividend Discount Model, also known as the 'Gordon Growth Model' or the 'Perpetuity with growth' equation.
### p_0= \frac{c_1}{r-g} ###
Which expression is equal to the expected dividend return?
Question 397 financial distress, leverage, capital structure, NPV
A levered firm has a market value of assets of $10m. Its debt is all comprised of 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.
Therefore the current market capitalisation of debt ##(D_0)## is $9m and equity ##(E_0)## is $1m.
A new project presents itself which requires an investment of $2m and will provide a:
- $6.6m cash flow with probability 0.5 in the good state of the world, and a
- -$4.4m (notice the negative sign) cash flow with probability 0.5 in the bad state of the world.
The project can be funded using the company's excess cash, no debt or equity raisings are required.
What would be the new market capitalisation of equity ##(E_\text{0, with project})## if shareholders vote to proceed with the project, and therefore should shareholders proceed with the project?
A low-quality second-hand car can be bought now for $1,000 and will last for 1 year before it will be scrapped for nothing.
A high-quality second-hand car can be bought now for $4,900 and it will last for 5 years before it will be scrapped for nothing.
What is the equivalent annual cost of each car? Assume a discount rate of 10% pa, given as an effective annual rate.
The answer choices are given as the equivalent annual cost of the low-quality car and then the high quality car.
Question 536 idiom, bond pricing, capital structure, leverage
The expression 'my word is my bond' is often used in everyday language to make a serious promise.
Why do you think this expression uses the metaphor of a bond rather than a share?
An American wishes to convert USD 1 million to Australian dollars (AUD). The exchange rate is 0.8 USD per AUD. How much is the USD 1 million worth in AUD?
Question 578 inflation, real and nominal returns and cash flows
Which of the following statements about inflation is NOT correct?
Alice, Bob, Chris and Delta are traders in the futures market. The following trades occur over a single day in a newly-opened equity index future that matures in one year which the exchange just made available.
1. Alice buys a future from Bob.
2. Chris buys a future from Delta.
3. Alice buys a future from Chris.
These were the only trades made in this equity index future. What was the trading volume and what is the open interest?
Which Australian institution is in charge of monetary policy?