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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 87  fully amortising loan, APR

You want to buy an apartment worth $500,000. You have saved a deposit of $50,000. The bank has agreed to lend you the $450,000 as a fully amortising mortgage loan with a term of 25 years. The interest rate is 6% pa and is not expected to change.

What will be your monthly payments?



Question 288  Annuity

There are many ways to write the ordinary annuity formula.

Which of the following is NOT equal to the ordinary annuity formula?



Question 289  DDM, expected and historical returns, ROE

In the dividend discount model:

###P_0 = \dfrac{C_1}{r-g}###

The return ##r## is supposed to be the:



Question 313  foreign exchange rate, American and European terms

If the AUD appreciates against the USD, the American terms quote of the AUD will or ?



Question 383  Merton model of corporate debt, real option, option

In the Merton model of corporate debt, buying a levered company's debt is equivalent to buying the company's assets and:



Question 386  Merton model of corporate debt, real option, option

A risky firm will last for one period only (t=0 to 1), then it will be liquidated. So it's assets will be sold and the debt holders and equity holders will be paid out in that order. The firm has the following quantities:

##V## = Market value of assets.

##E## = Market value of (levered) equity.

##D## = Market value of zero coupon bonds.

##F_1## = Total face value of zero coupon bonds which is promised to be paid in one year.

Image of risky debt

The risky corporate debt graph above contains bold labels a to e. Which of the following statements about those labels is NOT correct?



Question 458  capital budgeting, no explanation

Which of the following is NOT a valid method to estimate future revenues or costs in a pro-forma income statement when trying to value a company?



Question 683  open interest, trade volume, future

Alice, Bob, Chris and Delta are traders in the futures market. The following trades occur over a single day in a newly-opened equity index future that matures in one year which the exchange just made available.

1. Alice buys a future from Bob.

2. Chris buys a future from Delta.

3. Alice buys a future from Chris.

These were the only trades made in this equity index future. What was the trading volume and what is the open interest?



Question 924  foreign exchange rate, forward foreign exchange rate, arbitrage, forward interest rate, no explanation

Suppose that the yield curve in the United States of America and Australia is flat and that the current:

  • USD federal funds rate is 1% pa;
  • AUD cash rate is 1.5% pa;
  • Spot AUD exchange rate is 1 USD per AUD;
  • One year forward AUD exchange rate is 0.97 USD per AUD.

You suspect that there’s an arbitrage opportunity.

Which one of the following statements about the potential arbitrage opportunity is NOT correct?