Fight Finance

Question 18  DDM, income and capital returns

The following equation is the Dividend Discount Model, also known as the 'Gordon Growth Model' or the 'Perpetuity with growth' equation.

### p_{0} = \frac{c_1}{r_{\text{eff}} - g_{\text{eff}}} ###

What is the discount rate '## r_\text{eff} ##' in this equation?

(a) The expected total return of the stock.

(b) The expected capital return of the stock.

(c) The expected dividend return of the stock.

(d) The expected income return of the stock.

(e) The expected growth rate of the stock price.

Question 102  option, hedging

A company runs a number of slaughterhouses which supply hamburger meat to McDonalds. The company is afraid that live cattle prices will increase over the next year, even though there is widespread belief in the market that they will be stable. What can the company do to hedge against the risk of increasing live cattle prices? Which statement(s) are correct?

(i) buy call options on live cattle.

(ii) buy put options on live cattle.

(iii) sell call options on live cattle.

Select the most correct response:

(a) Only (i) is true.

(b) Only (ii) is true.

(c) Only (iii) is true.

(d) Only (i) and (ii) is true.

(e) All statements (i), (ii) and (iii) are true.

Question 112  CAPM, risk

According to the theory of the Capital Asset Pricing Model (CAPM), total risk can be broken into two components, systematic risk and idiosyncratic risk. Which of the following events would be considered a systematic, undiversifiable event according to the theory of the CAPM?

(a) A decrease in house prices in one city.

(b) An increase in mining industry tax rates.

(c) An increase in corporate tax rates.

(d) A case of fraud at a major retailer.

(e) A poor earnings announcement from a major firm.

Question 200  NPV, 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.

If all of the dividends since time period zero were deposited into a bank account yielding 8% pa as an effective annual rate, how much money will be in the bank account in 2.5 years (in other words, at t=2.5)?

(a) 14.85

(b) 15.84

(c) 16.89

(d) 19.20

(e) 21.82

Question 440  option, no explanation

Two put options are exactly the same, but one has a low and the other has a high exercise price. Which option would you expect to have the higher price, the option with the or exercise price, or should they have the price?

Question 673  CAPM, beta, expected and historical returns

A stock has a beta of 1.5. The market's expected total return is 10% pa and the risk free rate is 5% pa, both given as effective annual rates.

In the last 5 minutes, bad economic news was released showing a higher chance of recession. Over this time the share market fell by 1%. The risk free rate was unchanged.

What do you think was the stock's historical return over the last 5 minutes, given as an effective 5 minute rate?

(a) -12.5%

(b) -4%

(c) -1.5%

(d) -1%

(e) 12.5%

Question 690  option

A trader just bought a European style put option on CBA stock. The current option premium is $2, the exercise price is $75, the option matures in one year and the spot CBA stock price is $74.

Which of the following statements is NOT correct?

(a) The long trader paid the option premium at the start.

(b) The option is 'out of the money' at the start.

(c) The long trader wishes for the underlying CBA stock price to fall.

(d) The option can only be exercised at maturity.

(e) If the stock price falls to $60 at maturity, then the long trader can buy the underlying stock for $60, exercise his option to sell the underlying stock to his counterparty for $75, making a payoff at maturity of $15 and a profit of $13.

Question 754  fully amortising loan, interest only loan

How much more can you borrow using an interest-only loan compared to a 25-year fully amortising loan if interest rates are 4% pa compounding per month and are not expected to change? If it makes it easier, assume that you can afford to pay $2,000 per month on either loan. Express your answer as a proportional increase using the following formula:

###\text{Proportional Increase} = \dfrac{V_\text{0,interest only}}{V_\text{0,fully amortising}} - 1###

(a) 63.1508%

(b) 60.0299%

(c) 58.3511%

(d) 36.8492%

(e) 11.5269%

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 896  comparative advantage in trade, production possibilities curve, no explanation

Adam and Bella are the only people on a remote island. Their production possibility curves are shown in the graph.

Which of the following statements is NOT correct?

(a) Adam has the absolute advantage at picking coconuts.

(b) Adam has the absolute advantage at picking dates.

(c) Adam has the comparative advantage at picking coconuts.

(d) Bella has the comparative advantage at picking coconuts.