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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 79  CAPM, risk

Which statement is the most correct?

Question 258  bill pricing, simple interest rate

A 60-day Bank Accepted Bill has a face value of $1,000,000. The interest rate is 8% pa and there are 365 days in the year. What is its price now?

Question 474  PE ratio

The below screenshot of Commonwealth Bank of Australia's (CBA) details were taken from the Google Finance website on 7 Nov 2014. Some information has been deliberately blanked out.

Image of CBA on Google finance on 7 Nov 2014

What was CBA's backwards-looking price-earnings ratio?

Question 574  inflation, real and nominal returns and cash flows, NPV

What is the present value of a nominal payment of $100 in 5 years? The real discount rate is 10% pa and the inflation rate is 3% pa.

Question 596  future, continuously compounding rate

An equity index is currently at 5,000 points. The 2 year futures price is 5,400 points and the total required return is 8% pa with continuous compounding. Each index point is worth $25.

What is the implied continuous dividend yield as a continuously compounded rate per annum?

Question 839  option, put call parity

A stock, a call, a put and a bond are available to trade. The call and put options' underlying asset is the stock they and have the same strike prices, ##K_T##.

You are currently long the stock. You want to hedge your long stock position without actually trading the stock. How would you do this?

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:

Question 954  option, at the money option

If a put option is at-the-money, then the spot price (##S_0##) is than, than or to the put option's strike price (##K_T##)?

Error, deal 990 does not exist.

Copyright © 2014 Keith Woodward