Fight Finance

Question 192  NPV, APR

Harvey Norman the large retailer often runs sales advertising 2 years interest free when you purchase its products. This offer can be seen as a free personal loan from Harvey Norman to its customers.

Assume that banks charge an interest rate on personal loans of 12% pa given as an APR compounding per month. This is the interest rate that Harvey Norman deserves on the 2 year loan it extends to its customers. Therefore Harvey Norman must implicitly include the cost of this loan in the advertised sale price of its goods.

If you were a customer buying from Harvey Norman, and you were paying immediately, not in 2 years, what is the minimum percentage discount to the advertised sale price that you would insist on? (Hint: if it makes it easier, assume that you’re buying a product with an advertised price of $100).

(a) 79.72%

(b) 24.00%

(c) 21.24%

(d) 20.28%

(e) 12.00%

Question 209  CFFA

Find Piano Bar's Cash Flow From Assets (CFFA), also known as Free Cash Flow to the Firm (FCFF), over the year ending 30th June 2013.

Piano Bar
Income Statement for
year ending 30th June 2013
	$m
Sales	310
COGS	185
Operating expense	20
Depreciation	15
Interest expense	10
Income before tax	80
Tax at 30%	24
Net income	56

Piano Bar
Balance Sheet
as at 30th June	2013	2012
	$m	$m
Assets
Current assets	240	230
PPE
Cost	420	400
Accumul. depr.	50	35
Carrying amount	370	365
Total assets	610	595
Liabilities
Current liabilities	180	190
Non-current liabilities	290	265
Owners' equity
Retained earnings	90	90
Contributed equity	50	50
Total L and OE	610	595

 

Note: all figures are given in millions of dollars ($m).

(a) 116

(b) 61

(c) 56

(d) 41

(e) 11

Question 310  foreign exchange rate

Is it possible for all countries' exchange rates to appreciate by 5% in the same year, including the USD? or ?

Question 538  bond pricing, income and capital returns, no explanation

Risk-free government bonds that have coupon rates greater than their yields:

(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.

Question 578  inflation, real and nominal returns and cash flows

Which of the following statements about inflation is NOT correct?

(a) Real returns approximately equal nominal returns less the inflation rate.

(b) Constant prices are the same as real prices.

(c) Current prices are the same as nominal prices.

(d) If your nominal wage grows by inflation, then your real wage won't change because you will be able to buy the same amount of goods and services as before.

(e) Interest rates advertised at the bank are usually quoted in real terms.

Question 592  future, margin call

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?

(a) A price fall of $0.76 per pound.

(b) A price fall of $0.10 per pound.

(c) A price fall of $0.04 per pound.

(d) A price rise of $0.04 per pound.

(e) A price rise of $0.10 per pound.

Question 706  utility, risk aversion, utility function

Mr Blue, Miss Red and Mrs Green are people with different utility functions.

Note that a fair gamble is a bet that has an expected value of zero, such as paying $0.50 to win $1 in a coin flip with heads or nothing if it lands tails. Fairly priced insurance is when the expected present value of the insurance premiums is equal to the expected loss from the disaster that the insurance protects against, such as the cost of rebuilding a home after a catastrophic fire.

Which of the following statements is NOT correct?

(a) Mr Blue, Miss Red and Mrs Green all prefer more wealth to less. This is rational from an economist's point of view.

(b) Mr Blue is risk averse. He will not enjoy a fair gamble and would like to buy fairly priced insurance.

(c) Miss Red is risk-neutral. She will not enjoy a fair gamble but wouldn't oppose it either. Similarly with fairly priced insurance.

(d) Mrs Green is risk-loving. She would enjoy a fair gamble and would dislike fairly priced insurance.

(e) Mr Blue would like to buy insurance, but only if it is fairly or under priced.

Question 794  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 call option?

(a) ##N[d_1]##

(b) ##N[d_2]##

(c) ##−N[−d_1]##

(d) ##−N[−d_2]##

(e) ##N[−d_2]##

Where:

###d_1=\dfrac{\ln⁡[S_0/K]+(r+\sigma^2/2).T)}{\sigma.\sqrt{T}}### ###d_2=d_1-\sigma.\sqrt{T}=\dfrac{\ln⁡[S_0/K]+(r-\sigma^2/2).T)}{\sigma.\sqrt{T}}###

Question 796  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 risk-neutral probability that a European call option will be exercised?

(a) ##N[d_1]##

(b) ##N[d_2]##

(c) ##−N[−d_1]##

(d) ##−N[−d_2]##

(e) ##N[−d_2]##

Question 806  stock split, no explanation

A firm conducts a two-for-one stock split. Which of the following consequences would NOT be expected?

(a) The share price would halve.

(b) The number of shares would double.

(c) The market capitalisation of equity would be unchanged.

(d) The earnings per share (EPS) would halve.

(e) The price-earnings (PE) ratio would halve.