A very low-risk stock just paid its semi-annual dividend of $0.14, as it has for the last 5 years. You conservatively estimate that from now on the dividend will fall at a rate of 1% every 6 months.
If the stock currently sells for $3 per share, what must be its required total return as an effective annual rate?
If risk free government bonds are trading at a yield of 4% pa, given as an effective annual rate, would you consider buying or selling the stock?
The stock's required total return is:
A 30 year Japanese government bond was just issued at par with a yield of 1.7% pa. The fixed coupon payments are semi-annual. The bond has a face value of $100.
Six months later, just after the first coupon is paid, the yield of the bond increases to 2% pa. What is the bond's new price?
The hardest and most important aspect of business project valuation is the estimation of the:
The below screenshot of Commonwealth Bank of Australia's (CBA) details were taken from the Google Finance website on 7 Nov 2014. Some information has been deliberately blanked out.
What was CBA's market capitalisation of equity?
Find the cash flow from assets (CFFA) of the following project.
| One Year Mining Project Data | ||
| Project life | 1 year | |
| Initial investment in building mine and equipment | $9m | |
| Depreciation of mine and equipment over the year | $8m | |
| Kilograms of gold mined at end of year | 1,000 | |
| Sale price per kilogram | $0.05m | |
| Variable cost per kilogram | $0.03m | |
| Before-tax cost of closing mine at end of year | $4m | |
| Tax rate | 30% | |
Note 1: Due to the project, the firm also anticipates finding some rare diamonds which will give before-tax revenues of $1m at the end of the year.
Note 2: The land that will be mined actually has thermal springs and a family of koalas that could be sold to an eco-tourist resort for an after-tax amount of $3m right now. However, if the mine goes ahead then this natural beauty will be destroyed.
Note 3: The mining equipment will have a book value of $1m at the end of the year for tax purposes. However, the equipment is expected to fetch $2.5m when it is sold.
Find the project's CFFA at time zero and one. Answers are given in millions of dollars ($m), with the first cash flow at time zero, and the second at time one.
An investor owns a whole level of an old office building which is currently worth $1 million. There are three mutually exclusive projects that can be started by the investor. The office building level can be:
- Rented out to a tenant for one year at $0.1m paid immediately, and then sold for $0.99m in one year.
- Refurbished into more modern commercial office rooms at a cost of $1m now, and then sold for $2.4m when the refurbishment is finished in one year.
- Converted into residential apartments at a cost of $2m now, and then sold for $3.4m when the conversion is finished in one year.
All of the development projects have the same risk so the required return of each is 10% pa. The table below shows the estimated cash flows and internal rates of returns (IRR's).
| Mutually Exclusive Projects | |||
| Project | Cash flow now ($) |
Cash flow in one year ($) |
IRR (% pa) |
| Rent then sell as is | -900,000 | 990,000 | 10 |
| Refurbishment into modern offices | -2,000,000 | 2,400,000 | 20 |
| Conversion into residential apartments | -3,000,000 | 3,400,000 | 13.33 |
Which project should the investor accept?
Question 576 inflation, real and nominal returns and cash flows
What is the present value of a nominal payment of $1,000 in 4 years? The nominal discount rate is 8% pa and the inflation rate is 2% pa.
A trader sells one crude oil European style call option contract on the CME expiring in one year with an exercise price of $44 per barrel for a price of $6.64. The crude oil spot price is $40.33. If the trader doesn’t close out her contract before maturity, then at maturity she will have the:
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?
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}}###