Fight Finance

Question 146  APR, effective rate

A three year corporate bond yields 12% pa with a coupon rate of 10% pa, paid semi-annually.

Find the effective six month yield, effective annual yield and the effective daily yield. Assume that each month has 30 days and that there are 360 days in a year.

All answers are given in the same order:

##r_\text{eff semi-annual}##, ##r_\text{eff yearly}##, ##r_\text{eff daily}##.

(a) 0.06, 0.1236, 0.000324.

(b) 0.058301, 0.12, 0.000315.

(c) 0.05, 0.1025, 0.000271.

(d) 0.05, 0.1, 0.000278.

(e) 0.048809, 0.1, 0.000265.

Question 199  NPV, DDM, no explanation

A stock is expected to pay the following dividends:

Cash Flows of a Stock
Time (yrs)	0	1	2	3	4	...
Dividend ($)	0	6	12	18	20	...

After year 4, the dividend will grow in perpetuity at 5% pa. The required return of the stock is 10% pa. Both the growth rate and required return are given as effective annual rates.

What will be the price of the stock in 7 years (t = 7), just after the dividend at that time has been paid?

(a) 420.00

(b) 463.05

(c) 463.53

(d) 486.20

(e) 510.51

Question 231  CAPM

A fairly priced stock has a beta that is the same as the market portfolio's beta. Treasury bonds yield 5% pa and the market portfolio's expected return is 10% pa. What is the expected return of the stock?

(a) 5%

(b) 7.5%

(c) 10%

(d) 15%

(e) 20%

Question 252  NPV

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

You wish to consume an equal amount now (t=0), in one year (t=1) and in two years (t=2), and still have $50,000 in the bank after that (t=2).

How much can you consume at each time?

(a) $36,555.8912

(b) $23,666.6667

(c) $21,450.1511

(d) $18,277.9456

(e) $16,666.6667

Question 359  CFFA

Which one of the following will have no effect on net income (NI) but decrease cash flow from assets (CFFA or FFCF) in this year for a tax-paying firm, all else remaining constant?

Remember:

###NI=(Rev-COGS-FC-Depr-IntExp).(1-t_c )### ###CFFA=NI+Depr-CapEx - ΔNWC+IntExp###

(a) An increase in revenue (Rev).

(b) An increase in rent expense (a type of recurring fixed cost, FC).

(c) An increase in depreciation expense (Depr).

(d) An increase in inventories (a current asset).

(e) An decrease in interest expense (IntExp).

Question 434  Merton model of corporate debt, real option, option

A risky firm will last for one period only (t=0 to 1), then it will be liquidated. So it's assets will be sold and the debt holders and equity holders will be paid out in that order. The firm has the following quantities:

##V## = Market value of assets.

##E## = Market value of (levered) equity.

##D## = Market value of zero coupon bonds.

##F_1## = Total face value of zero coupon bonds which is promised to be paid in one year.

What is the payoff to debt holders at maturity, assuming that they keep their debt until maturity?

(a) ##\max(V_1 - F_1,0)##.

(b) ##\max(F_1, V_1)##.

(c) ##\max(F_1, 0)##.

(d) ##\min(F_1, V_1)##.

(e) ##\min(V_1-F_1, F_1)##.

Question 494  franking credit, personal tax on dividends, imputation tax system

A firm pays a fully franked cash dividend of $100 to one of its Australian shareholders who has a personal marginal tax rate of 15%. The corporate tax rate is 30%.

What will be the shareholder's personal tax payable due to the dividend payment?

(a) -$21.4286

(b) -$7.563

(c) $15

(d) $21.4286

(e) $78.5714

Question 661  systematic and idiosyncratic risk, CAPM

A stock's total standard deviation of returns is 20% pa. The market portfolio's total standard deviation of returns is 15% pa. The beta of the stock is 0.8.

What is the stock's diversifiable standard deviation?

(a) 16% pa

(b) 12% pa

(c) 8% pa

(d) 5% pa

(e) 4% pa

Question 833  option, delta, theta, standard deviation, no explanation

Which of the following statements about an option (either a call or put) and its underlying stock is NOT correct?

(a) The option’s expected future continuously compounded returns are always more than or equal to the underlying stock’s expected future continuously compounded returns.

(b) The option’s standard deviation of dollar price changes is always less than or equal to the underlying stock’s standard deviation of dollar price changes.

(c) The option’s standard deviation of continuously compounded returns are always less than or equal to the underlying stock’s standard deviation of continuously compounded returns.

(d) As time elapses and the maturity date of an option approaches, its price will fall, all other things remaining equal.

(e) If the underlying stock’s price rises by $0.01, the call option’s price will rise by less than $0.01 and the put option’s price will fall by less than $0.01.

Question 924  foreign exchange rate, forward foreign exchange rate, arbitrage, forward interest rate, no explanation

Suppose that the yield curve in the United States of America and Australia is flat and that the current:

• USD federal funds rate is 1% pa;
• AUD cash rate is 1.5% pa;
• Spot AUD exchange rate is 1 USD per AUD;
• One year forward AUD exchange rate is 0.97 USD per AUD.

You suspect that there’s an arbitrage opportunity.

Which one of the following statements about the potential arbitrage opportunity is NOT correct?

(a) Right now, borrow USD in America, convert it into AUD at the spot, lend it in Australia, lock in to buy USD and sell AUD forward one year. One year later, withdraw the AUD, convert it into USD and pay back the USD loan.

(b) American debt may be over-priced, sell it.

(c) Australian debt may be under-priced, buy it.

(d) The spot AUD may be under-priced compared to the USD, buy the AUD now.

(e) The forward AUD may be under-priced compared to the USD, lock in to buy the AUD in one year.