Question 218 NPV, IRR, profitability index, average accounting return
Which of the following statements is NOT correct?
The Chinese government attempts to fix its exchange rate against the US dollar and at the same time use monetary policy to fix its interest rate at a set level.
To be able to fix its exchange rate and interest rate in this way, what does the Chinese government actually do?
- Adopts capital controls to prevent financial arbitrage by private firms and individuals.
- Adopts the same interest rate (monetary policy) as the United States.
- Fixes inflation so that the domestic real interest rate is equal to the United States' real interest rate.
Which of the above statements is or are true?
A pharmaceutical firm has just discovered a valuable new drug. So far the news has been kept a secret.
The net present value of making and commercialising the drug is $200 million, but $600 million of bonds will need to be issued to fund the project and buy the necessary plant and equipment.
The firm will release the news of the discovery and bond raising to shareholders simultaneously in the same announcement. The bonds will be issued shortly after.
Once the announcement is made and the bonds are issued, what is the expected increase in the value of the firm's assets (ΔV), market capitalisation of debt (ΔD) and market cap of equity (ΔE)?
The triangle symbol is the Greek letter capital delta which means change or increase in mathematics.
Ignore the benefit of interest tax shields from having more debt.
Remember: ##ΔV = ΔD+ΔE##
A share currently worth $100 is expected to pay a constant dividend of $4 for the next 5 years with the first dividend in one year (t=1) and the last in 5 years (t=5).
The total required return is 10% pa.
What do you expected the share price to be in 5 years, just after the dividend at that time has been paid?
Question 529 DDM, real and nominal returns and cash flows, inflation, real estate, no explanation
If housing rents are constrained from growing more than the maximum target inflation rate, and houses can be priced as a perpetuity of growing net rental cash flows, then what is the implication for house prices, all things remaining equal? Select the most correct answer.
Background: Since 1990, many central banks across the world have become 'inflation targeters'. They have adopted a policy of trying to keep inflation in a predictable narrow range, with the hope of encouraging long-term lending to fund more investment and maintain higher GDP growth.
Australia's central bank, the Reserve Bank of Australia (RBA), has specifically stated their inflation target range is between 2 and 3% pa.
Some Australian residential property market commentators suggest that because rental costs comprise a large part of the Australian consumer price index (CPI), rent costs across the nation cannot significantly exceed the maximum inflation target range of 3% pa without the prices of other goods growing by less than the target range for long periods, which is unlikely.
Question 744 income and capital returns, real and nominal returns and cash flows, inflation
If someone says "my shares rose by 10% last year", what do you assume that they mean? The effective annual:
"Buy low, sell high" is a well-known saying. It suggests that investors should buy low then sell high, in that order.
How would you re-phrase that saying to describe short selling?
Question 801 negative gearing, leverage, capital structure, no explanation
The following steps set out the process of ‘negative gearing’ an investment property in Australia. Which of these steps or statements is NOT correct? To successfully achieve negative gearing on an investment property:
Calculate Australia’s GDP over the 2016 calendar year using the below table:
| Australian Gross Domestic Product Components | ||||
| A$ billion, 2016 Calendar Year from 1 Jan 2016 to 31 Dec 2016 inclusive | ||||
| Consumption | Investment | Government spending | Exports | Imports |
| 971 | 421 | 320 | 328 | 344 |
Source: ABS 5206.0 Australian National Accounts: National Income, Expenditure and Product. Table 3. Expenditure on Gross Domestic Product (GDP), Current prices.
Over the 2016 calendar year, Australia’s GDP was:
Question 895 comparative advantage in trade, production possibilities curve
Adam and Bella are the only people on a remote island.
Luckily there are Coconut and Date palm trees on the island that grow delicious fruit. The problem is that harvesting the fruit takes a lot of work.
Adam can pick 7 coconuts per hour, 6 dates per hour or any linear combination of coconuts and dates. For example, he could pick 3.5 coconuts and 3 dates per hour.
Bella can pick 3 coconuts per hour, 5 dates per hour or any linear combination. For example, she could pick 1.5 coconuts and 2.5 dates per hour.
This information is summarised in the table and graph:
| Harvest Rates Per Hour | ||
| Coconuts | Dates | |
| Adam | 7 | 6 |
| Bella | 3 | 5 |
Which of the following statements is NOT correct?