A stock pays annual dividends. It just paid a dividend of $5. The growth rate in the dividend is 1% pa. You estimate that the stock's required return is 8% pa. Both the discount rate and growth rate are given as effective annual rates.
Using the dividend discount model, what will be the share price?
Three important classes of investable risky assets are:
- Corporate debt which has low total risk,
- Real estate which has medium total risk,
- Equity which has high total risk.
Assume that the correlation between total returns on:
- Corporate debt and real estate is 0.1,
- Corporate debt and equity is 0.1,
- Real estate and equity is 0.5.
You are considering investing all of your wealth in one or more of these asset classes. Which portfolio will give the lowest total risk? You are restricted from shorting any of these assets. Disregard returns and the risk-return trade-off, pretend that you are only concerned with minimising risk.
Over the next year, the management of an unlevered company plans to:
- Make $5m in sales, $1.9m in net income and $2m in equity free cash flow (EFCF).
- Pay dividends of $1m.
- Complete a $1.3m share buy-back.
Assume that:
- All amounts are received and paid at the end of the year so you can ignore the time value of money.
- The firm has sufficient retained profits to legally pay the dividend and complete the buy back.
- The firm plans to run a very tight ship, with no excess cash above operating requirements currently or over the next year.
How much new equity financing will the company need? In other words, what is the value of new shares that will need to be issued?
A trader buys one December futures contract on orange juice. Each contract is for the delivery of 10,000 pounds. The current futures price is $1.20 per pound. The initial margin is $5,000 per contract, and the maintenance margin is $4,000 per contract.
What is the smallest price change would that would lead to a margin call for the buyer?
Question 703 utility, risk aversion, utility function, gamble
Mr Blue, Miss Red and Mrs Green are people with different utility functions.
Each person has $500 of initial wealth. A coin toss game is offered to each person at a casino where the player can win or lose $500. Each player can flip a coin and if they flip heads, they receive $500. If they flip tails then they will lose $500. Which of the following statements is NOT correct?
Question 768 accounting terminology, book and market values, no explanation
Accountants and finance professionals have lots of names for the same things which can be quite confusing.
Which of the following groups of items are NOT synonyms?
Below is a graph of 3 peoples’ utility functions, Mr Blue (U=W^(1/2) ), Miss Red (U=W/10) and Mrs Green (U=W^2/1000). Assume that each of them currently have $50 of wealth.
Which of the following statements about them is NOT correct?
(a) Mr Blue would prefer to invest his wealth in a well diversified portfolio of stocks rather than a single stock, assuming that all stocks had the same total risk and return.
Question 795 option, Black-Scholes-Merton option pricing, option delta, no explanation
Which of the following quantities from the Black-Scholes-Merton option pricing formula gives the Delta of a European put option?
A Brazilian lady wishes to convert 1 million Brazilian Real (BRL) into Chinese Renminbi (RMB, also called the Yuan or CNY). The exchange rate is 3.42 BRL per USD and 6.27 RMB per USD. How much is the BRL 1 million worth in RMB?