Fight Finance

Question 239  income and capital returns, inflation, real and nominal returns and cash flows, interest only loan

A bank grants a borrower an interest-only residential mortgage loan with a very large 50% deposit and a nominal interest rate of 6% that is not expected to change. Assume that inflation is expected to be a constant 2% pa over the life of the loan. Ignore credit risk.

From the bank's point of view, what is the long term expected nominal capital return of the loan asset?

(a) Approximately 6%.

(b) Approximately 4%.

(c) Approximately 2%.

(d) Approximately 0%.

(e) Approximately -2%.

Question 336  forward foreign exchange rate, no explanation

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?

(a) 1.180572 AUD per USD

(b) 0.848966 AUD per USD

(c) 0.847047 AUD per USD

(d) 0.755566 AUD per USD

(e) 0.752954 AUD per USD

Question 367  CFFA, interest tax shield

There are many ways to calculate a firm's free cash flow (FFCF), also called cash flow from assets (CFFA). Some include the annual interest tax shield in the cash flow and some do not.

Which of the below FFCF formulas include the interest tax shield in the cash flow?

###(1) \quad FFCF=NI + Depr - CapEx -ΔNWC + IntExp### ###(2) \quad FFCF=NI + Depr - CapEx -ΔNWC + IntExp.(1-t_c)### ###(3) \quad FFCF=EBIT.(1-t_c )+ Depr- CapEx -ΔNWC+IntExp.t_c### ###(4) \quad FFCF=EBIT.(1-t_c) + Depr- CapEx -ΔNWC### ###(5) \quad FFCF=EBITDA.(1-t_c )+Depr.t_c- CapEx -ΔNWC+IntExp.t_c### ###(6) \quad FFCF=EBITDA.(1-t_c )+Depr.t_c- CapEx -ΔNWC### ###(7) \quad FFCF=EBIT-Tax + Depr - CapEx -ΔNWC### ###(8) \quad FFCF=EBIT-Tax + Depr - CapEx -ΔNWC-IntExp.t_c### ###(9) \quad FFCF=EBITDA-Tax - CapEx -ΔNWC### ###(10) \quad FFCF=EBITDA-Tax - CapEx -ΔNWC-IntExp.t_c###

The formulas for net income (NI also called earnings), EBIT and EBITDA are given below. Assume that depreciation and amortisation are both represented by 'Depr' and that 'FC' represents fixed costs such as rent.

###NI=(Rev - COGS - Depr - FC - IntExp).(1-t_c )### ###EBIT=Rev - COGS - FC-Depr### ###EBITDA=Rev - COGS - FC### ###Tax =(Rev - COGS - Depr - FC - IntExp).t_c= \dfrac{NI.t_c}{1-t_c}###

(a) 1, 3, 5, 7, 9.

(b) 2, 4, 6, 8, 10.

(c) 1, 4, 6, 8, 10.

(d) 2, 3, 5, 7, 9.

(e) 1, 3, 5, 8, 10.

Question 484  payout ratio, dividend, no explanation

The below screenshot of Microsoft's (MSFT) details were taken from the Google Finance website on 28 Nov 2014. Some information has been deliberately blanked out.

What was MSFT's approximate payout ratio over the last year?

Note that MSFT's past four quarterly dividends were $0.31, $0.28, $0.28 and $0.28.

(a) 45.1%

(b) 30.95%

(c) 13.96%

(d) 5.33%

(e) 2.41%

Question 673  CAPM, beta, expected and historical returns

A stock has a beta of 1.5. The market's expected total return is 10% pa and the risk free rate is 5% pa, both given as effective annual rates.

In the last 5 minutes, bad economic news was released showing a higher chance of recession. Over this time the share market fell by 1%. 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?

(a) -12.5%

(b) -4%

(c) -1.5%

(d) -1%

(e) 12.5%

Question 695  utility, risk aversion, utility function

Mr Blue, Miss Red and Mrs Green are people with different utility functions. Which of the statements about the 3 utility functions is NOT correct?

(a) All rational people prefer more wealth to less.

(b) Mr Blue is risk averse.

(c) Miss Red is risk neutral.

(d) Mrs Green is risk averse.

(e) Mrs Green may enjoy gambling.

Question 765  bond pricing, no explanation

An investor bought a 5 year government bond with a 2% pa coupon rate at par. Coupons are paid semi-annually. The face value is $100.

Calculate the bond's new price 8 months later after yields have increased to 3% pa. Note that both yields are given as APR's compounding semi-annually. Assume that the yield curve was flat before the change in yields, and remained flat afterwards as well.

(a) $95.345378

(b) $95.819741

(c) $96.138082

(d) $96.296464

(e) $96.775559

Question 836  VaR, no explanation

The 95% daily VaR corresponds to the result on the:

(a) Best day of the 5% worst days’ results.

(b) Worst day of the 5% worst days’ results.

(c) Best day of the 5% best days’ results.

(d) Worst day of the 5% best days’ results.

(e) Best day of the 95% worst days’ results.

Question 957  Annuity, NPV

The present value of an annuity of 3 annual payments of $5,000 in arrears (at the end of each year) is $12,434.26 when interest rates are 10% pa compounding annually.

If the same amount of $12,434.26 is put in the bank at the same interest rate of 10% pa compounded annually and the same cash flow of $5,000 is withdrawn at the end of every year, how much money will be in the bank in 3 years, just after that third $5,000 payment is withdrawn?

(a) $4,545.45

(b) $4,115.74

(c) $1,655

(d) $1,550

(e) $0

Question 958  confidence interval, normal distribution

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:

(a) 61.52% and -61.52% pa.

(b) 56.52% and -36.52% pa.

(c) 51.52% and -51.52% pa.

(d) 46.64% and -30.64% pa.

(e) 30% and -10% pa.