Question 245 foreign exchange rate, monetary policy, foreign exchange rate direct quote, no explanation
Investors expect Australia's central bank, the RBA, to leave the policy rate unchanged at their next meeting.
Then unexpectedly, the policy rate is reduced due to fears that Australia's GDP growth is slowing.
What do you expect to happen to Australia's exchange rate? Direct and indirect quotes are given from the perspective of an Australian.
The Australian dollar will:
Value the following business project to manufacture a new product.
Project Data | ||
Project life | 2 yrs | |
Initial investment in equipment | $6m | |
Depreciation of equipment per year | $3m | |
Expected sale price of equipment at end of project | $0.6m | |
Unit sales per year | 4m | |
Sale price per unit | $8 | |
Variable cost per unit | $5 | |
Fixed costs per year, paid at the end of each year | $1m | |
Interest expense per year | 0 | |
Tax rate | 30% | |
Weighted average cost of capital after tax per annum | 10% | |
Notes
- The firm's current assets and current liabilities are $3m and $2m respectively right now. This net working capital will not be used in this project, it will be used in other unrelated projects.
Due to the project, current assets (mostly inventory) will grow by $2m initially (at t = 0), and then by $0.2m at the end of the first year (t=1).
Current liabilities (mostly trade creditors) will increase by $0.1m at the end of the first year (t=1).
At the end of the project, the net working capital accumulated due to the project can be sold for the same price that it was bought. - The project cost $0.5m to research which was incurred one year ago.
Assumptions
- All cash flows occur at the start or end of the year as appropriate, not in the middle or throughout the year.
- All rates and cash flows are real. The inflation rate is 3% pa.
- All rates are given as effective annual rates.
- The business considering the project is run as a 'sole tradership' (run by an individual without a company) and is therefore eligible for a 50% capital gains tax discount when the equipment is sold, as permitted by the Australian Tax Office.
What is the expected net present value (NPV) of the project?
What is the net present value (NPV) of undertaking a full-time Australian undergraduate business degree as an Australian citizen? Only include the cash flows over the duration of the degree, ignore any benefits or costs of the degree after it's completed.
Assume the following:
- The degree takes 3 years to complete and all students pass all subjects.
- There are 2 semesters per year and 4 subjects per semester.
- University fees per subject per semester are $1,277, paid at the start of each semester. Fees are expected to remain constant in real terms for the next 3 years.
- There are 52 weeks per year.
- The first semester is just about to start (t=0). The first semester lasts for 19 weeks (t=0 to 19).
- The second semester starts immediately afterwards (t=19) and lasts for another 19 weeks (t=19 to 38).
- The summer holidays begin after the second semester ends and last for 14 weeks (t=38 to 52). Then the first semester begins the next year, and so on.
- Working full time at the grocery store instead of studying full-time pays $20/hr and you can work 35 hours per week. Wages are paid at the end of each week and are expected to remain constant in real terms.
- Full-time students can work full-time during the summer holiday at the grocery store for the same rate of $20/hr for 35 hours per week.
- The discount rate is 9.8% pa. All rates and cash flows are real. Inflation is expected to be 3% pa. All rates are effective annual.
The NPV of costs from undertaking the university degree is:
Question 363 income and capital returns, inflation, real and nominal returns and cash flows, real estate
A residential investment property has an expected nominal total return of 8% pa and nominal capital return of 3% pa.
Inflation is expected to be 2% pa. All rates are given as effective annual rates.
What are the property's expected real total, capital and income returns? The answer choices below are given in the same order.
After doing extensive fundamental analysis of a company, you believe that their shares are overpriced and will soon fall significantly. The market believes that there will be no such fall.
Which of the following strategies is NOT a good idea, assuming that your prediction is true?
A $100 stock has a continuously compounded expected total return of 10% pa. Its dividend yield is 2% pa with continuous compounding. What do you expect its price to be in one year?
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.
What do you think will be the stock's expected return over the next year, given as an effective annual rate?
Question 787 fixed for floating interest rate swap, intermediated swap
The below table summarises the borrowing costs confronting two companies A and B.
Bond Market Yields | ||||
Fixed Yield to Maturity (%pa) | Floating Yield (%pa) | |||
Firm A | 2 | L - 0.1 | ||
Firm B | 2.5 | L | ||
Firm A wishes to borrow at a floating rate and Firm B wishes to borrow at a fixed rate. Design an intermediated swap (which means there will actually be two swaps) that nets a bank 0.15% and grants the remaining swap benefits to Firm A only. Which of the following statements about the swap is NOT correct?
You intend to use futures on oil to hedge the risk of purchasing oil. There is no cross-hedging risk. Oil pays no dividends but it’s costly to store. Which of the following statements about basis risk in this scenario is NOT correct?
Question 877 arithmetic and geometric averages, utility, utility function
Gross discrete returns in different states of the world are presented in the table below. A gross discrete return is defined as ##P_1/P_0##, where ##P_0## is the price now and ##P_1## is the expected price in the future. An investor can purchase only a single asset, A, B, C or D. Assume that a portfolio of assets is not possible.
Gross Discrete Returns | ||
In Different States of the World | ||
Investment | World states (probability) | |
asset | Good (50%) | Bad (50%) |
A | 2 | 0.5 |
B | 1.1 | 0.9 |
C | 1.1 | 0.95 |
D | 1.01 | 1.01 |
Which of the following statements about the different assets is NOT correct? Asset: