Fight Finance

Which of the following discount rates should be the highest for a levered company? Ignore the costs of financial distress.

Investors expect Australia's central bank, the RBA, to reduce the policy rate at their next meeting due to fears that the economy is slowing. Then unexpectedly, the policy rate is actually kept unchanged.

What do you expect to happen to Australia's exchange rate?

A mining firm has just discovered a new mine. So far the news has been kept a secret.

The net present value of digging the mine and selling the minerals is $250 million, but $500 million of new equity and $300 million of new 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 equity and bond raising to shareholders simultaneously in the same announcement. The shares and bonds will be issued shortly after.

Once the announcement is made and the new shares and bonds are issued, what is the expected increase in the value of the firm's assets ##(\Delta V)##, market capitalisation of debt ##(\Delta D)## and market cap of equity ##(\Delta E)##? Assume that markets are semi-strong form efficient.

The triangle symbol ##\Delta## 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: ##\Delta V = \Delta D+ \Delta E##

An Apple iPhone 6 smart phone can be bought now for $999. An Android Kogan Agora 4G+ smart phone can be bought now for $240.

If the Kogan phone lasts for one year, approximately how long must the Apple phone last for to have the same equivalent annual cost?

Assume that both phones have equivalent features besides their lifetimes, that both are worthless once they've outlasted their life, the discount rate is 10% pa given as an effective annual rate, and there are no extra costs or benefits from either phone.

What is the covariance of a variable X with itself?

The cov(X, X) or ##\sigma_{X,X}## equals:

What derivative position are you exposed to if you have the obligation to sell the underlying asset at maturity, so you will definitely be forced to sell the underlying asset?

Being long a call and short a put which have the same exercise prices and underlying stock is equivalent to being:

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?

A stock's returns are normally distributed with a mean of 8% pa and a standard deviation of 15 percentage points pa. What is the 99% confidence interval of returns over the next year? Note that the Z-statistic corresponding to a one-tail:

• 90% normal probability density function is 1.282.
• 95% normal probability density function is 1.645.
• 97.5% normal probability density function is 1.960.
• 99% normal probability density function is 2.326.
• 99.5% normal probability density function is 2.576

The 99% confidence interval of annual returns is between:

When does the ‘principal-agent problem’ occur? Is it when:

I. The principal has conflicting incentives (moral hazard);

II. The agent has conflicting incentives (moral hazard);

III. The principal has incomplete information about the agent (asymmetric information); or

IV. The agent has incomplete information about the principal (asymmetric information)?

The principal-agent problem occurs when statements: