A stock is expected to pay the following dividends:
| Cash Flows of a Stock | ||||||
| Time (yrs) | 0 | 1 | 2 | 3 | 4 | ... |
| Dividend ($) | 0 | 6 | 12 | 18 | 20 | ... |
After year 4, the dividend will grow in perpetuity at 5% pa. The required return of the stock is 10% pa. Both the growth rate and required return are given as effective annual rates.
If all of the dividends since time period zero were deposited into a bank account yielding 8% pa as an effective annual rate, how much money will be in the bank account in 2.5 years (in other words, at t=2.5)?
Find UniBar Corp's Cash Flow From Assets (CFFA), also known as Free Cash Flow to the Firm (FCFF), over the year ending 30th June 2013.
| UniBar Corp | ||
| Income Statement for | ||
| year ending 30th June 2013 | ||
| $m | ||
| Sales | 80 | |
| COGS | 40 | |
| Operating expense | 15 | |
| Depreciation | 10 | |
| Interest expense | 5 | |
| Income before tax | 10 | |
| Tax at 30% | 3 | |
| Net income | 7 | |
| UniBar Corp | ||
| Balance Sheet | ||
| as at 30th June | 2013 | 2012 |
| $m | $m | |
| Assets | ||
| Current assets | 120 | 90 |
| PPE | ||
| Cost | 360 | 320 |
| Accumul. depr. | 40 | 30 |
| Carrying amount | 320 | 290 |
| Total assets | 440 | 380 |
| Liabilities | ||
| Current liabilities | 110 | 60 |
| Non-current liabilities | 190 | 180 |
| Owners' equity | ||
| Retained earnings | 95 | 95 |
| Contributed equity | 45 | 45 |
| Total L and OE | 440 | 380 |
Note: all figures are given in millions of dollars ($m).
Your neighbour asks you for a loan of $100 and offers to pay you back $120 in one year.
You don't actually have any money right now, but you can borrow and lend from the bank at a rate of 10% pa. Rates are given as effective annual rates.
Assume that your neighbour will definitely pay you back. Ignore interest tax shields and transaction costs.
The Net Present Value (NPV) of lending to your neighbour is $9.09. Describe what you would do to actually receive a $9.09 cash flow right now with zero net cash flows in the future.
The Australian cash rate is expected to be 6% pa while the US federal funds rate is expected to be 4% pa over the next 3 years, both given as effective annual rates. The current exchange rate is 0.80 AUD per USD.
What is the implied 3 year forward foreign exchange rate?
Stocks in the United States usually pay quarterly dividends. For example, the software giant Microsoft paid a $0.23 dividend every quarter over the 2013 financial year and plans to pay a $0.28 dividend every quarter over the 2014 financial year.
Using the dividend discount model and net present value techniques, calculate the stock price of Microsoft assuming that:
- The time now is the beginning of July 2014. The next dividend of $0.28 will be received in 3 months (end of September 2014), with another 3 quarterly payments of $0.28 after this (end of December 2014, March 2015 and June 2015).
- The quarterly dividend will increase by 2.5% every year, but each quarterly dividend over the year will be equal. So each quarterly dividend paid in the financial year beginning in September 2015 will be $ 0.287 ##(=0.28×(1+0.025)^1)##, with the last at the end of June 2016. In the next financial year beginning in September 2016 each quarterly dividend will be $0.294175 ##(=0.28×(1+0.025)^2)##, with the last at the end of June 2017, and so on forever.
- The total required return on equity is 6% pa.
- The required return and growth rate are given as effective annual rates.
- Dividend payment dates and ex-dividend dates are at the same time.
- Remember that there are 4 quarters in a year and 3 months in a quarter.
What is the current stock price?
A firm has 1 million shares which trade at a price of $30 each. The firm is expected to announce earnings of $3 million at the end of the year and pay an annual dividend of $1.50 per share.
What is the firm's (forward looking) price/earnings (PE) ratio?
An Indonesian lady wishes to convert 1 million Indonesian rupiah (IDR) to Australian dollars (AUD). Exchange rates are 13,125 IDR per USD and 0.79 USD per AUD. How many AUD is the IDR 1 million worth?
Question 786 fixed for floating interest rate swap, intermediated swap
The below table summarises the borrowing costs confronting two companies A and B.
| Bond Market Yields | ||||
| Fixed Yield to Maturity (%pa) | Floating Yield (%pa) | |||
| Firm A | 3 | L - 0.4 | ||
| Firm B | 5 | L + 1 | ||
Firm A wishes to borrow at a floating rate and Firm B wishes to borrow at a fixed rate. Design an intermediated swap (which means there will actually be two swaps) that nets a bank 0.1% and shares the remaining swap benefits between Firms A and B equally. Which of the following statements about the swap is NOT correct?
A stock, a call, a put and a bond are available to trade. The call and put options' underlying asset is the stock they and have the same strike prices, ##K_T##.
You are currently long the stock. You want to hedge your long stock position without actually trading the stock. How would you do this?
Question 874 utility, return distribution, log-normal distribution, arithmetic and geometric averages
Who was the first theorist to endorse the maximisiation of the geometric average gross discrete return for investors (not gamblers) since it gave a "...portfolio that has a greater probability of being as valuable or more valuable than any other significantly different portfolio at the end of n years, n being large"?