Fight Finance

Question 14  bond pricing

For a price of $100, Andrea will sell you a 2 year bond paying annual coupons of 10% pa. The face value of the bond is $100. Other bonds with the same risk, maturity and coupon characteristics trade at a yield of 6% pa.

Would you like to the bond or politely ?

Question 142  DDM, income and capital returns

When using the dividend discount model to price a stock:

### p_{0} = \frac{d_1}{r - g} ###

The growth rate of dividends (g):

(a) Is the stock's required return.

(b) Is the stock's expected total return.

(c) Is the stock's expected dividend return.

(d) Is the stock's expected real yield.

(e) Should be less than the expected GDP growth rate of the country where the company does business.

Question 375  interest tax shield, CFFA

One formula for calculating a levered firm's free cash flow (FFCF, or CFFA) is to use net operating profit after tax (NOPAT).

###\begin{aligned} FFCF &= NOPAT + Depr - CapEx -\Delta NWC \\ &= (Rev - COGS - Depr - FC)(1-t_c) + Depr - CapEx -\Delta NWC \\ \end{aligned} \\###

Does this annual FFCF or the annual interest tax shield?

Question 492  capital budgeting, opportunity cost, sunk cost

A man has taken a day off from his casual painting job to relax.

It's the end of the day and he's thinking about the hours that he could have spent working (in the past) which are now:

(a) A sunk cost.

(b) An opportunity cost.

(c) A negative side effect.

(d) A capital expense.

(e) A depreciation expense.

Question 556  portfolio risk, portfolio return, standard deviation

An investor wants to make a portfolio of two stocks A and B with a target expected portfolio return of 12% pa.

• Stock A has an expected return of 10% pa and a standard deviation of 20% pa.
• Stock B has an expected return of 15% pa and a standard deviation of 30% pa.

The correlation coefficient between stock A and B's expected returns is 70%.

What will be the annual standard deviation of the portfolio with this 12% pa target return?

(a) 24.28168% pa

(b) 24% pa

(c) 22.126907% pa

(d) 19.697716% pa

(e) 16.970563% pa

Question 571  foreign exchange rate

An Indonesian lady wishes to convert 1 million Indonesian rupiah (IDR) to Australian dollars (AUD). Exchange rates are 13,125 IDR per USD and 0.79 USD per AUD. How many AUD is the IDR 1 million worth?

(a) AUD 16,613,924,050.63

(b) AUD 10,368,750,000.00

(c) AUD 10,368.75

(d) AUD 96.44

(e) AUD 60.19

Question 591  short selling, future, option

After doing extensive fundamental analysis of a company, you believe that their shares are overpriced and will soon fall significantly. The market believes that there will be no such fall.

Which of the following strategies is NOT a good idea, assuming that your prediction is true?

(a) Sell any of the firm's shares that you already own.

(b) Short-sell the firm's shares.

(c) Sell futures written on the shares.

(d) Buy put options written on the shares.

(e) Buy call options written on the shares.

Question 619  CFFA

To value a business's assets, the free cash flow of the firm (FCFF, also called CFFA) needs to be calculated. This requires figures from the firm's income statement and balance sheet. For what figures is the balance sheet needed? Note that the balance sheet is sometimes also called the statement of financial position.

(a) Net income, depreciation and interest expense.

(b) Depreciation and capital expenditure.

(c) Current assets, current liabilities and cost of goods sold (COGS).

(d) Current assets, current liabilities and capital expenditure.

(e) Current assets, current liabilities and depreciation expense.

Question 657  systematic and idiosyncratic risk, CAPM, no explanation

A stock's required total return will decrease when its:

(a) Systematic risk increases.

(b) Idiosyncratic risk increases.

(c) Total risk increases.

(d) Systematic risk decreases.

(e) Idiosyncratic risk decreases.

Question 717  return distribution

The below three graphs show probability density functions (PDF) of three different random variables Red, Green and Blue. Let ##P_1## be the unknown price of a stock in one year. ##P_1## is a random variable. Let ##P_0 = 1##, so the share price now is $1. This one dollar is a constant, it is not a variable.

Which of the below statements is NOT correct? Financial practitioners commonly assume that the shape of the PDF represented in the colour:

(a) Green is a stock's continuously compounded rate of return, also called the log gross discrete return. ##r_\text{cc} = \ln(P_1/P_0)##

(b) Blue is a stock's future price, ##P_1##

(c) Blue is a stock's gross discrete return. ##\text{GDR} = P_1/P_0##

(d) Blue is a stock's effective rate of return. ##r_\text{eff} = (P_1-P_0)/P_0##

(e) Red is a stock's net discrete return. ##\text{NDR} = \text{GDR}-1##