A share just paid its semi-annual dividend of $10. The dividend is expected to grow at 2% every 6 months forever. This 2% growth rate is an effective 6 month rate. Therefore the next dividend will be $10.20 in six months. The required return of the stock 10% pa, given as an effective annual rate.
What is the price of the share now?
Bonds X and Y are issued by the same US company. Both bonds yield 6% pa, and they have the same face value ($100), maturity, seniority, and payment frequency.
The only difference is that bond X pays coupons of 8% pa and bond Y pays coupons of 12% pa. Which of the following statements is true?
Question 659 APR, effective rate, effective rate conversion, no explanation
A home loan company advertises an interest rate of 9% pa, payable monthly. Which of the following statements about the interest rate is NOT correct? All rates are given with an accuracy of 4 decimal places.
A share will pay its next dividend of ##C_1## in one year, and will continue to pay a dividend every year after that forever, growing at a rate of ##g##. So the next dividend will be ##C_2=C_1 (1+g)^1##, then ##C_3=C_2 (1+g)^1##, and so on forever.
The current price of the share is ##P_0## and its required return is ##r##
Which of the following is NOT equal to the expected share price in 2 years ##(P_2)## just after the dividend at that time ##(C_2)## has been paid?
Use the below information to value a levered company with annual perpetual cash flows from assets that grow. The next cash flow will be generated in one year from now. Note that ‘k’ means kilo or 1,000. So the $30k is $30,000.
| Data on a Levered Firm with Perpetual Cash Flows | ||
| Item abbreviation | Value | Item full name |
| ##\text{OFCF}## | $30k | Operating free cash flow |
| ##g## | 1.5% pa | Growth rate of OFCF |
| ##r_\text{D}## | 4% pa | Cost of debt |
| ##r_\text{EL}## | 16.3% pa | Cost of levered equity |
| ##D/V_L## | 80% pa | Debt to assets ratio, where the asset value includes tax shields |
| ##t_c## | 30% | Corporate tax rate |
| ##n_\text{shares}## | 100k | Number of shares |
Which of the following statements is NOT correct?
Question 858 indirect security, intermediated finance, no explanation
Which of the following transactions involves an ‘indirect security’ using a ‘financial intermediary’?
Question 903 option, Black-Scholes-Merton option pricing, option on stock index
A six month European-style call option on the S&P500 stock index has a strike price of 2800 points.
The underlying S&P500 stock index currently trades at 2700 points, has a continuously compounded dividend yield of 2% pa and a standard deviation of continuously compounded returns of 25% pa.
The risk-free interest rate is 5% pa continuously compounded.
Use the Black-Scholes-Merton formula to calculate the option price. The call option price now is:
A stock's returns are normally distributed with a mean of 10% pa and a standard deviation of 20 percentage points pa. What is the 90% confidence interval of returns over the next year? Note that the Z-statistic corresponding to a one-tail:
- 90% normal probability density function is 1.282.
- 95% normal probability density function is 1.645.
- 97.5% normal probability density function is 1.960.
The 90% confidence interval of annual returns is between:
You work for XYZ company and you’ve been asked to evaluate a new project which has double the systematic risk of the company’s other projects.
You use the Capital Asset Pricing Model (CAPM) formula and input the treasury yield ##(r_f )##, market risk premium ##(r_m-r_f )## and the company’s asset beta risk factor ##(\beta_{XYZ} )## into the CAPM formula which outputs a return.
This return that you’ve just found is: