A share pays annual dividends. It just paid a dividend of $2. The growth rate in the dividend is 3% 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 is the share price?

**Question 282** expected and historical returns, income and capital returns

You're the boss of an investment bank's equities research team. Your five analysts are each trying to find the **expected total return** over the next year of shares in a mining company. The mining firm:

- Is regarded as a mature company since it's quite stable in size and was floated around 30 years ago. It is not a high-growth company;
- Share price is very sensitive to changes in the price of the market portfolio, economic growth, the exchange rate and commodities prices. Due to this, its standard deviation of total returns is much higher than that of the market index;
- Experienced tough times in the last 10 years due to unexpected falls in commodity prices.
- Shares are traded in an active liquid market.

Assume that:

- The analysts' source data is correct and true, but their inferences might be wrong;
- All returns and yields are given as effective annual nominal rates.

**Question 447** payout policy, corporate financial decision theory

Payout policy is most closely related to which part of a business?

**Question 584** option, option payoff at maturity, option profit

Which of the following statements about European call options on non-dividend paying stocks is **NOT** correct?

**Question 658** CFFA, income statement, balance sheet, no explanation

To value a business's assets, the free cash flow of the firm (FCFF, also called CFFA) needs to be calculated. This requires figures from the firm's income statement and balance sheet. For what figures is the income statement needed? Note that the income statement is sometimes also called the profit and loss, P&L, or statement of financial performance.

**Question 790** mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate, log-normal distribution, VaR, confidence interval

A risk manager has identified that their hedge fund’s continuously compounded portfolio returns are normally distributed with a mean of **10**% pa and a standard deviation of **30**% pa. The hedge fund’s portfolio is currently valued at $**100** million. Assume that there is no estimation error in these figures and that the normal cumulative density function at 1.644853627 is 95%.

Which of the following statements is **NOT** correct? All answers are rounded to the nearest dollar.

**Question 876** foreign exchange rate, forward foreign exchange rate, cross currency interest rate parity

Suppose the yield curve in the USA and Germany is flat and the:

- USD federal funds rate at the Federal Reserve is
**1**% pa; - EUR deposit facility at the European Central Bank is
**-0.4**% pa (note the negative sign); - Spot EUR exchange rate is
**1**USD per EUR; - One year forward EUR exchange rate is
**1.011**USD per EUR.

You suspect that there’s an arbitrage opportunity. Which one of the following statements about the potential arbitrage opportunity is **NOT** correct?

The market's expected total return is 10% pa and the risk free rate is 5% pa, both given as effective annual rates.

A stock has a beta of 0.7.

In the last 5 minutes, bad economic news was released showing a higher chance of recession. Over this time the share market **fell** by **2**%. The risk free rate was unchanged. What do you think was the stock's historical return over the last **5 minutes**, given as an effective 5 minute rate?

**Question 974** foreign exchange rate, monetary policy, no explanation

Suppose the market expects the Bank of Japan (BoJ) to **increase** their short term interest rate by 15 basis points at their next meeting. The current short term interest rate is -0.1% pa and the exchange rate is 100 JPY per USD.

As expected, the BoJ announce that they will **increase** short term interest rate by 15 basis points.

What do you expect to happen to Japan’s exchange rate on the day when the announcement is made? The Japanese Yen (JPY) is likely to: