A wholesale shop offers credit to its customers. The customers are given 21 days to pay for their goods. But if they pay straight away (now) they get a 1% discount.
What is the effective interest rate given to customers who pay in 21 days? All rates given below are effective annual rates. Assume 365 days in a year.
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).
Find Scubar Corporation's Cash Flow From Assets (CFFA), also known as Free Cash Flow to the Firm (FCFF), over the year ending 30th June 2013.
| Scubar Corp | ||
| Income Statement for | ||
| year ending 30th June 2013 | ||
| $m | ||
| Sales | 200 | |
| COGS | 60 | |
| Depreciation | 20 | |
| Rent expense | 11 | |
| Interest expense | 19 | |
| Taxable Income | 90 | |
| Taxes at 30% | 27 | |
| Net income | 63 | |
| Scubar Corp | ||
| Balance Sheet | ||
| as at 30th June | 2013 | 2012 |
| $m | $m | |
| Inventory | 60 | 50 |
| Trade debtors | 19 | 6 |
| Rent paid in advance | 3 | 2 |
| PPE | 420 | 400 |
| Total assets | 502 | 458 |
| Trade creditors | 10 | 8 |
| Bond liabilities | 200 | 190 |
| Contributed equity | 130 | 130 |
| Retained profits | 162 | 130 |
| Total L and OE | 502 | 458 |
Note: All figures are given in millions of dollars ($m).
The cash flow from assets was:
A young lady is trying to decide if she should attend university. Her friends say that she should go to university because she is more likely to meet a clever young man than if she begins full time work straight away.
What's the correct way to classify this item from a capital budgeting perspective when trying to find the Net Present Value of going to university rather than working?
The opportunity to meet a desirable future spouse should be classified as:
An investor bought a 10 year 2.5% pa fixed coupon government bond priced at par. The face value is $100. Coupons are paid semi-annually and the next one is in 6 months.
Six months later, just after the coupon at that time was paid, yields suddenly and unexpectedly fell to 2% pa. Note that all yields above are given as APR's compounding semi-annually.
What was the bond investors' historical total return over that first 6 month period, given as an effective semi-annual rate?
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 0.5.
In the last 5 minutes, the federal government unexpectedly raised taxes. Over this time the share market fell by 3%. The risk free rate was unchanged.
What do you think was the stock's historical return over the last 5 minutes, given as an effective 5 minute rate?
Question 793 option, hedging, delta hedging, gamma hedging, gamma, Black-Scholes-Merton option pricing
A bank buys 1000 European put options on a $10 non-dividend paying stock at a strike of $12. The bank wishes to hedge this exposure. The bank can trade the underlying stocks and European call options with a strike price of 7 on the same stock with the same maturity. Details of the call and put options are given in the table below. Each call and put option is on a single stock.
| European Options on a Non-dividend Paying Stock | |||
| Description | Symbol | Put Values | Call Values |
| Spot price ($) | ##S_0## | 10 | 10 |
| Strike price ($) | ##K_T## | 12 | 7 |
| Risk free cont. comp. rate (pa) | ##r## | 0.05 | 0.05 |
| Standard deviation of the stock's cont. comp. returns (pa) | ##\sigma## | 0.4 | 0.4 |
| Option maturity (years) | ##T## | 1 | 1 |
| Option price ($) | ##p_0## or ##c_0## | 2.495350486 | 3.601466138 |
| ##N[d_1]## | ##\partial c/\partial S## | 0.888138405 | |
| ##N[d_2]## | ##N[d_2]## | 0.792946442 | |
| ##-N[-d_1]## | ##\partial p/\partial S## | -0.552034778 | |
| ##N[-d_2]## | ##N[-d_2]## | 0.207053558 | |
| Gamma | ##\Gamma = \partial^2 c/\partial S^2## or ##\partial^2 p/\partial S^2## | 0.098885989 | 0.047577422 |
| Theta | ##\Theta = \partial c/\partial T## or ##\partial p/\partial T## | 0.348152078 | 0.672379961 |
Which of the following statements is NOT correct?
Question 807 market efficiency, expected and historical returns, CAPM, beta, systematic risk, no explanation
You work in Asia and just woke up. It looked like a nice day but then you read the news and found out that last night the American share market fell by 10% while you were asleep due to surprisingly poor macro-economic world news. You own a portfolio of liquid stocks listed in Asia with a beta of 1.6. When the Asian equity markets open, what do you expect to happen to your share portfolio? Assume that the capital asset pricing model (CAPM) is correct and that the market portfolio contains all shares in the world, of which American shares are a big part. Your portfolio beta is measured against this world market portfolio.
When the Asian equity market opens for trade, you would expect your portfolio value to:
Question 823 option, option payoff at maturity, option profit, no explanation
A European call option should only be exercised if:
A company has a 95% daily Value at Risk (VaR) of $1 million. The units of this VaR are in: