Fight Finance

(a) 900

(b) 2,700

(c) 2,722.1

(d) 2,843.71

(e) 34,424.99

(a) Buy less land, buildings and trucks than what was planned. Assume that this has no impact on revenue.

(b) Pay off more debt than was planned, to reduce the firm’s interest expense.

(c) Change the depreciation method used for tax purposes from diminishing value to straight line, so less depreciation occurs this year and more occurs in later years. Assume that the government’s tax department allow this.

(d) Buying more inventory than was planned, so there is an increase in net working capital. Assume that there is no increase in sales.

(e) Raising new equity through a rights issue. Assume that all of the money raised is spent on new capital assets such as land and trucks, but they will be fitted out and delivered in one year so no new cash will be earned from them.

(a) 0.1634

(b) 0.0801

(c) 0.0704

(d) 0.07

(e) 0.0095

(a) total required yield

(b) cost of capital

(c) discount rate

(d) opportunity cost of capital

(e) accounting rate of return

(a) 16% pa

(b) 12% pa

(c) 8% pa

(d) 5% pa

(e) 4% pa

(a) Neither Miss Red nor Mrs Green would appear rational to an economist.

(b) Mrs Green is satiated when she has $25 of wealth. That is her bliss point.

(c) Mrs Green is risk loving when she has between zero and $25 of wealth, same as Mr Blue.

(d) Mrs Green is risk averse when she has between $25 and $50 of wealth.

(e) Mrs Green is risk loving when she has between $50 and $100 of wealth, same as Mr Blue.

(a) The market portfolio M has systematic risk only. It’s a fully diversified portfolio comprised of all individual risky assets. The market portfolio is usually assumed to be the equity index, such as the ASX200 in Australia or the S&P500 in the US.

(b) The risk free security has no risk at all. Government bonds are usually assumed to be the risk-free security.

(c) Portfolio combinations of the market portfolio and risk free security will plot on the CML and will have systematic risk only. They will have no diversifiable risk.

(d) The portfolios on the CML with a return above ##r_f## have maximum return for any given level of risk.

(e) The individual assets and portfolios with returns less than the risk free rate are over-priced, have a negative Jensen’s alpha and should be sold.

(a) Options are always worth more than or equal to equivalent European-style options.

(b) Call options on dividend-paying stocks should sometimes be exercised just before the dividend.

(c) Put options on dividend-paying stocks should sometimes be exercised just after the dividend.

(d) Call options should be exercised now if the intrinsic option value ##(S-K)## is greater than the expected present value of the option’s future payoffs.

(e) Put options should be exercised now if the intrinsic option value ##(K-S)## is less than the expected present value of the option’s future payoffs.

(a) $100,000.

(b) $28,000.

(c) $20,000.

(d) $8,000.

(e) $1,600.

(a) Provide a permanent and unrestricted commitment of funds;

(b) Are freely available to absorb losses;

(c) Impose unavoidable servicing charges against earnings;

(d) Rank behind the claims of depositors and other creditors in the event of winding-up of the issuer.