Fundamentalists who analyse company financial reports and news announcements (but who don't have inside information) will make positive abnormal returns if:

**Question 416** real estate, market efficiency, income and capital returns, DDM, CAPM

A residential real estate investor believes that house prices will grow at a rate of **5**% pa and that rents will grow by **2**% pa forever.

All rates are given as nominal effective annual returns. Assume that:

- His forecast is true.
- Real estate is and always will be fairly priced and the capital asset pricing model (CAPM) is true.
- Ignore all costs such as taxes, agent fees, maintenance and so on.
- All rental income cash flow is paid out to the owner, so there is no re-investment and therefore no additions or improvements made to the property.
- The non-monetary benefits of owning real estate and renting remain constant.

Which one of the following statements is **NOT** correct? Over time:

**Question 432** option, option intrinsic value, no explanation

An American call option with a strike price of ##K## dollars will mature in ##T## years. The underlying asset has a price of ##S## dollars.

What is an expression for the current **intrinsic** value in dollars from owning (being long) the American call option? Note that the intrinsic value of an option does not subtract the premium paid to buy the option.

A firm has a debt-to-equity ratio of 60%. What is its debt-to-assets ratio?

Estimate the French bank Societe Generale's share price using a backward-looking price earnings (PE) multiples approach with the following assumptions and figures only. Note that EUR is the euro, the European monetary union's currency.

- The 4 major European banks Credit Agricole (ACA), Deutsche Bank AG (DBK), UniCredit (UCG) and Banco Santander (SAN) are comparable companies to Societe Generale (GLE);
- Societe Generale's (GLE's) historical earnings per share (EPS) is EUR 2.92;
- ACA's backward-looking PE ratio is 16.29 and historical EPS is EUR 0.84;
- DBK's backward-looking PE ratio is 25.01 and historical EPS is EUR 1.26;
- SAN's backward-looking PE ratio is 14.71 and historical EPS is EUR 0.47;
- UCG's backward-looking PE ratio is 15.78 and historical EPS is EUR 0.40;

Note: Figures sourced from Google Finance on 27 March 2015.

A trader **buys** one crude oil **futures** contract on the CME expiring in one year with a locked-in futures price of $38.94 per barrel. If the trader doesn’t close out her contract before expiry then in one year she will have the:

Radio-Rentals.com offers the Apple iphone 5S smart phone for rent at $**12.95** per week paid in **advance** on a **2** year contract. After renting the phone, you must return it to Radio-Rentals.

Kogan.com offers the Apple iphone 5S smart phone for sale at $**699**. You estimate that the phone will last for **3** years before it will break and be worthless.

Currently, the effective annual interest rate is **11.351**%, the effective monthly interest rate **0.9**% and the effective weekly interest rate is **0.207**%. Assume that there are exactly **52** weeks per year and **12** months per year.

Find the equivalent annual cost of renting the phone and also buying the phone. The answers below are listed in the same order.

**Question 869** economic order quantity

A Queensland farmer grows strawberries in greenhouses and supplies Australian supermarkets all year round. The farmer must decide how often he should contract the truck driver to deliver his strawberries and how many boxes to send on each delivery. The farmer:

- Sells
**100,000**boxes of strawberries per year; - Incurs holding costs (refrigeration and spoilage) of $
**16**per box per year; and - Must pay the truck driver delivery fees at $
**0.20**per box plus a $**500**fixed fee per delivery.

Which of the following statements about the Economic Order Quantity is **NOT** correct?

Which of the following statements about the Basel 3 minimum capital requirements is **NOT** correct? Common equity tier 1 (CET1) comprises the highest quality components of capital that fully satisfy all of the following characteristics: