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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?

Question 22  NPV, perpetuity with growth, effective rate, effective rate conversion

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

The first payment of $90 is in 3 years, followed by payments every 6 months in perpetuity after that which shrink by 3% every 6 months. That is, the growth rate every 6 months is actually negative 3%, given as an effective 6 month rate. So the payment at ## t=3.5 ## years will be ## 90(1-0.03)^1=87.3 ##, and so on.

Question 183  bond pricing

A five year bond has a face value of $100, a yield of 12% and a fixed coupon rate of 6%, paid semi-annually.

What is the bond's price?

Question 259  fully amortising loan, APR

You want to buy a house priced at $400,000. You have saved a deposit of $40,000. The bank has agreed to lend you $360,000 as a fully amortising loan with a term of 30 years. The interest rate is 8% pa payable monthly and is not expected to change.

What will be your monthly payments?

Question 342  CFFA, capital budgeting

A new company's Firm Free Cash Flow (FFCF, same as CFFA) is forecast in the graph below.

Image of option graphs

To value the firm's assets, the terminal value needs to be calculated using the perpetuity with growth formula:

###V_{\text{terminal, }t-1} = \dfrac{FFCF_{\text{terminal, }t}}{r-g}###

Which point corresponds to the best time to calculate the terminal value?

Question 584  option, option payoff at maturity, option profit

Which of the following statements about European call options on non-dividend paying stocks is NOT correct?

Question 790  mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate, log-normal distribution, VaR, confidence interval

A risk manager has identified that their hedge fund’s continuously compounded portfolio returns are normally distributed with a mean of 10% pa and a standard deviation of 30% pa. The hedge fund’s portfolio is currently valued at $100 million. Assume that there is no estimation error in these figures and that the normal cumulative density function at 1.644853627 is 95%.

Which of the following statements is NOT correct? All answers are rounded to the nearest dollar.

Question 817  expected and historical returns, income and capital returns

Over the last year, a constant-dividend-paying stock's price fell, while it's future expected dividends and profit remained the same. Assume that:

  • Now is ##t=0##, last year is ##t=-1## and next year is ##t=1##;
  • The dividend is paid at the end of each year, the last dividend was just paid today ##(C_0)## and the next dividend will be paid next year ##(C_1)##;
  • Markets are efficient and the dividend discount model is suitable for valuing the stock.

Which of the following statements is NOT correct? The stock's:

Question 900  Basel accord

Which of the following statements about the Basel 3 minimum capital requirements is NOT correct? Common equity tier 1 (CET1) comprises the highest quality components of capital that fully satisfy all of the following characteristics:

Question 906  effective rate, return types, net discrete return, return distribution, price gains and returns over time

For an asset's price to double from say $1 to $2 in one year, what must its effective annual return be? Note that an effective annual return is also called a net discrete return per annum. If the price now is ##P_0## and the price in one year is ##P_1## then the effective annul return over the next year is:

###r_\text{effective annual} = \dfrac{P_1 - P_0}{P_0} = \text{NDR}_\text{annual}###

Copyright © 2014 Keith Woodward