Fight Finance

(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.

(a) $7.2968

(b) $7.5018

(c) $7.6667

(d) $7.7522

(e) $9.4101

(a) If stock A's return increases, stock B's return is also expected to increase.

(b) If stock A's return decreases, stock B's return is also expected to decrease.

(c) If stock A and B were combined in a portfolio, there would be no diversification at all since they are positively correlated.

(d) Stock A and B's returns have positive covariance.

(e) a and b.

(a) The firm's share price and shareholder wealth will both decrease. This is because the firm will have more debt and therefore more risk so the discount rate applied to its cash flows will be higher, decreasing the value of the firm and therefore the value of the firm's equity and share price.

(b) The firm's share price and shareholder wealth will both increase. This is because the firm will have more debt which will amplify the returns of equity investors. This will mean that returns on equity can be much higher and investors will pay a premium for this, leading to an increase in the stock price.

(c) The firm's share price and shareholder wealth will both increase since it has more debt and therefore more tax shields.

(d) The firm's share price will increase due to the higher value of tax shields. But shareholder wealth will remain unchanged because capital structure is irrelevant when investors can use home-made leverage to create tax-shields themselves.

(e) The firm's share price and shareholder wealth will both increase. This is because the cost of debt is cheaper than equity, leading to a lower (before and after tax) WACC. This lower WACC will lead to a higher value of the firm and a higher share price.

(a) Markets are weak-form efficient.

(b) Markets are semi-strong-form efficient.

(c) Past prices cannot be used to predict future prices.

(d) Past returns can be used to predict future returns.

(e) Stock prices reflect all publically available information.

(a) Appreciate against the USD, so the 'American terms' quote of the AUD (USD per AUD) will increase.

(b) Depreciate against the USD, so the 'American terms' quote of the AUD (USD per AUD) will decrease.

(c) Appreciate against the USD, so the 'American terms' quote of the AUD (USD per AUD) will decrease.

(d) Depreciate against the USD, so the 'American terms' quote of the AUD (USD per AUD) will increase.

(e) Be unaffected by the change in the policy rate, so the exchange rate will remain the same.

(a) Because bonds are higher risk investments than shares.

(b) Because issuers must pay bond holders or face bankruptcy, while payments to shareholders are discretionary.

(c) Because bond holders are paid last in the event of bankruptcy, while shareholders are paid first.

(d) Because bonds always pay higher returns than shares.

(e) Because bonds are generally more liquid than shares.

(a) Are discount bonds.

(b) Have positive expected capital returns.

(c) Have higher expected income returns than total returns.

(d) Have prices less than their face values.

(e) Have significant credit risk.

(a) A yield curve graph shows bonds' spot yields at different maturities. The y-axis shows spot yields and the x-axis shows the bonds' times to maturity.

(b) A yield curve is a graph of forward rates.

(c) Normal yield curves slope upwards, they have a positive gradient.

(d) A yield curve is 'as at' a certain date, it's a snapshot in time.

(e) Every point on the yield curve corresponds to a different bond with a different maturity.

(a) The expected dividend yield is 6% pa.

(b) The expected growth rate of the dividend is 4% pa.

(c) The dividend in one year is expected to be $0.06.

(d) The price is expected to be $1.06 in one year, just before the dividend is paid.

(e) The price is expected to be $1.04 in one year, just after the dividend is paid.