For certain shares, the forward-looking Price-Earnings Ratio (##P_0/EPS_1##) is equal to the inverse of the share's total expected return (##1/r_\text{total}##).

For what shares is this true?

Assume:

- The general accounting definition of 'payout ratio' which is dividends per share (DPS) divided by earnings per share (EPS).
- All cash flows, earnings and rates are real.

**Question 210** real estate, inflation, real and nominal returns and cash flows, income and capital returns

Assume that the Gordon Growth Model (same as the dividend discount model or perpetuity with growth formula) is an appropriate method to value real estate.

The rule of thumb in the real estate industry is that properties should yield a **5**% pa rental return. Many investors also regard property to be as risky as the stock market, therefore property is thought to have a required **total** return of **9**% pa which is the average total return on the stock market including dividends.

Assume that all returns are effective annual rates and they are **nominal** (not reduced by inflation). Inflation is expected to be **2**% pa.

You're considering purchasing an investment property which has a rental yield of 5% pa and you expect it to have the same risk as the stock market. Select the most correct statement about this property.

A company announces that it will pay a dividend, as the market expected. The company's shares trade on the stock exchange which is open from 10am in the morning to 4pm in the afternoon each weekday. When would the share price be expected to fall by the amount of the dividend? Ignore taxes.

The share price is expected to fall during the:

**Question 408** leverage, portfolio beta, portfolio risk, real estate, CAPM

You just bought a house worth $**1,000,000**. You financed it with an $**800,000** mortgage loan and a deposit of $**200,000**.

You estimate that:

- The house has a beta of
**1**; - The mortgage loan has a beta of
**0.2**.

What is the beta of the equity (the $200,000 deposit) that you have in your house?

Also, if the risk free rate is **5**% pa and the market portfolio's return is **10**% pa, what is the expected return on equity in your house? Ignore taxes, assume that all cash flows (interest payments and rent) were paid and received at the end of the year, and all rates are effective annual rates.

**Question 449** personal tax on dividends, classical tax system

A small private company has a single shareholder. This year the firm earned a $**100** profit **before** tax. All of the firm's after tax profits will be paid out as dividends to the owner.

The corporate tax rate is **30**% and the sole shareholder's personal marginal tax rate is **45**%.

The United States' **classical tax system** applies because the company generates all of its income in the US and pays corporate tax to the Internal Revenue Service. The shareholder is also an American for tax purposes.

What will be the personal tax payable by the shareholder and the corporate tax payable by the company?

You own some nice shoes which you use once per week on date nights. You bought them **2** years ago for $**500**. In your experience, shoes used once per week last for **6** years. So you expect yours to last for another **4** years.

Your younger sister said that she wants to borrow your shoes once per week. With the increased use, your shoes will only last for another **2** years rather than 4.

What is the present value of the cost of letting your sister use your current shoes for the next 2 years?

Assume: that bank interest rates are **10**% pa, given as an effective annual rate; you will buy a new pair of shoes when your current pair wears out and your sister will not use the new ones; your sister will only use your current shoes so she will only use it for the next 2 years; and the price of new shoes never changes.

The following cash flows are expected:

- Constant perpetual yearly payments of $70, with the first payment in 2.5 years from now (first payment at t=2.5).
- A single payment of $600 in 3 years and 9 months (t=3.75) from now.

What is the NPV of the cash flows if the discount rate is 10% given as an effective annual rate?

**Question 636** option, option payoff at maturity, no explanation

Which of the below formulas gives the payoff ##(f)## at maturity ##(T)## from being **long** a **call** option? Let the underlying asset price at maturity be ##S_T## and the exercise price be ##X_T##.

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, so a perpetuity can be used to value this firm. 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{CFFA}_\text{U}## | $30k | Cash flow from assets excluding interest tax shields (unlevered) |

##g## | 1.5% pa | Growth rate of cash flow from assets, levered and unlevered |

##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 |

Which of the following statements is **NOT** correct?

What is the Cash Conversion Cycle for a firm with a:

- Payables period of 1 day;
- Inventory period of 50 days; and
- Receivables period of 30 days?

All answer options are in days: