Fight Finance

Question 155  inflation, real and nominal returns and cash flows, Loan, effective rate conversion

You are a banker about to grant a 2 year loan to a customer. The loan's principal and interest will be repaid in a single payment at maturity, sometimes called a zero-coupon loan, discount loan or bullet loan.

You require a real return of 6% pa over the two years, given as an effective annual rate. Inflation is expected to be 2% this year and 4% next year, both given as effective annual rates.

You judge that the customer can afford to pay back $1,000,000 in 2 years, given as a nominal cash flow. How much should you lend to her right now?

(a) $838,907.00

(b) $838,986.09

(c) $841,754.97

(d) $889,996.44

(e) $944,108.22

Question 368  interest tax shield, CFFA

A method commonly seen in textbooks for calculating a levered firm's free cash flow (FFCF, or CFFA) is the following:

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

Does this annual FFCF or the annual interest tax shield?

Question 451  DDM

The first payment of a constant perpetual annual cash flow is received at time 5. Let this cash flow be ##C_5## and the required return be ##r##.

So there will be equal annual cash flows at time 5, 6, 7 and so on forever, and all of the cash flows will be equal so ##C_5 = C_6 = C_7 = ...##

When the perpetuity formula is used to value this stream of cash flows, it will give a value (V) at time:

(a) 0, so ##V_0=\dfrac{C_5}{r}##

(b) 1, so ##V_1=\dfrac{C_5}{r}##

(c) 4, so ##V_4=\dfrac{C_5}{r}##

(d) 5, so ##V_5=\dfrac{C_5}{r}##

(e) 6, so ##V_6=\dfrac{C_5}{r}##

Question 505  equivalent annual cash flow

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.

(a) $100,   $490

(b) $909.09,   $608.5

(c) $1,000,   $980

(d) $1,000,   $1578.3

(e) $1,100,   $1,292.61

Question 537  PE ratio, Multiples valuation, no explanation

Estimate the French bank Societe Generale's share price using a backward-looking price earnings (PE) multiples approach with the following assumptions and figures only. Note that EUR is the euro, the European monetary union's currency.

• The 4 major European banks Credit Agricole (ACA), Deutsche Bank AG (DBK), UniCredit (UCG) and Banco Santander (SAN) are comparable companies to Societe Generale (GLE);
• Societe Generale's (GLE's) historical earnings per share (EPS) is EUR 2.92;
• ACA's backward-looking PE ratio is 16.29 and historical EPS is EUR 0.84;
• DBK's backward-looking PE ratio is 25.01 and historical EPS is EUR 1.26;
• SAN's backward-looking PE ratio is 14.71 and historical EPS is EUR 0.47;
• UCG's backward-looking PE ratio is 15.78 and historical EPS is EUR 0.40;

Note: Figures sourced from Google Finance on 27 March 2015.

(a) EUR 209.6268

(b) EUR 52.4067

(c) EUR 8.6724

(d) EUR 3.9327

(e) EUR 2.1681

Question 818  option, future, no explanation

Which derivatives position has the possibility of unlimited potential gains?

(a) Long call.

(b) Short call.

(c) Long put.

(d) Short put.

(e) Short future.

Question 859  money supply, no explanation

The below table shows Australian monetary aggregates. Note that ‘M3’ is the sum of all the figures in the table and ‘ADI’ stands for Authorised Deposit-taking Institution such as a bank, building society or credit union.

Australian Monetary Aggregates
March 2017, AUD billions
Currency	Current deposits with banks	Certificates of deposit issued by banks	Term deposits with banks	Other deposits with banks	Deposits with non-bank ADIs	M3
69.3	271.6	207.2	562.3	838.7	36.9	1986.0

 

Source: RBA Statistical Table D3 Monetary Aggregates.

Which of the following statements is NOT correct?

(a) Current deposits are the notes and coins that banks keep in their physical vaults and Automatic Teller Machines (ATM’s).

(b) Current deposits with banks pay little interest to depositors but are highly liquid since they can be withdrawn using ATM’s.

(c) The government directly controls the amount of notes and coins.

(d) The central bank indirectly controls the amount of deposits by changing the cash rate.

(e) When a commercial bank lends money to a borrower to buy a house, that money is likely to be deposited by the house seller into another bank.

Question 920  SML, CAPM, Sharpe ratio, Treynor ratio, Jensens alpha, no explanation

Over-priced assets should NOT:

(a) Have Sharpe ratios less than the market’s.

(b) Have Treynor ratios that are negative.

(c) Have Jensen’s alphas that are negative.

(d) Be sold.

(e) Plot below the Security Market Line (SML).

Question 948  VaR, expected shortfall

Below is a historical sample of returns on the S&P500 capital index.

S&P500 Capital Index Daily Returns Ranked from Best to Worst
10,000 trading days from 4th August 1977 to 24 March 2017 based on closing prices.
Rank	Date (DD-MM-YY)	Continuously compounded daily return (% per day)
1	21-10-87	9.23
2	08-03-83	8.97
3	13-11-08	8.3
4	30-09-08	8.09
5	28-10-08	8.01
6	29-10-87	7.28
…	…	…
9980	11-12-08	-5.51
9981	22-10-08	-5.51
9982	08-08-11	-5.54
9983	22-09-08	-5.64
9984	11-09-86	-5.69
9985	30-11-87	-5.88
9986	14-04-00	-5.99
9987	07-10-98	-6.06
9988	08-01-88	-6.51
9989	27-10-97	-6.55
9990	13-10-89	-6.62
9991	15-10-08	-6.71
9992	29-09-08	-6.85
9993	07-10-08	-6.91
9994	14-11-08	-7.64
9995	01-12-08	-7.79
9996	29-10-08	-8.05
9997	26-10-87	-8.4
9998	31-08-98	-8.45
9999	09-10-08	-12.9
10000	19-10-87	-23.36
Mean of all 10,000:		0.0354
Sample standard deviation of all 10,000:		1.2062
Sources: Bloomberg and S&P.

 

Assume that the one-tail Z-statistic corresponding to a probability of 99.9% is exactly 3.09. Which of the following statements is NOT correct? Based on the historical data, the 99.9% daily:

(a) Absolute non-parametric VaR is 6.62% per day.

(b) Relative non-parametric VaR is 6.6554% per day.

(c) Absolute parametric VaR is 6.173521% per day.

(d) Relative parametric VaR is 3.727158% per day.

(e) Non-parametric expected shortfall is 9.706% per day.

Question 967  foreign exchange rate, no explanation

A New Zealand lady wants to calculate how many New Zealand Dollars (NZD) she needs to buy a 1 million Australian dollar (AUD) house in Sydney, Australia. The exchange rate is 0.69 USD per NZD and 0.72 USD per AUD. What is the AUD 1 million equivalent to in NZD?

(a) NZD 496,800

(b) NZD 958,333

(c) NZD 1,043,478

(d) NZD 2,012,882

(e) NZD 2,971,216