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Question 249  equivalent annual cash flow, effective rate conversion

Details of two different types of desserts or edible treats are given below:

  • High-sugar treats like candy, chocolate and ice cream make a person very happy. High sugar treats are cheap at only $2 per day.
  • Low-sugar treats like nuts, cheese and fruit make a person equally happy if these foods are of high quality. Low sugar treats are more expensive at $4 per day.

The advantage of low-sugar treats is that a person only needs to pay the dentist $2,000 for fillings and root canal therapy once every 15 years. Whereas with high-sugar treats, that treatment needs to be done every 5 years.

The real discount rate is 10%, given as an effective annual rate. Assume that there are 365 days in every year and that all cash flows are real. The inflation rate is 3% given as an effective annual rate.

Find the equivalent annual cash flow (EAC) of the high-sugar treats and low-sugar treats, including dental costs. The below choices are listed in that order.

Ignore the pain of dental therapy, personal preferences and other factors.

Question 300  NPV, opportunity cost

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 stay constant 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.
  • 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. Wages are paid at the end of each 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 308  risk, standard deviation, variance, no explanation

A stock's standard deviation of returns is expected to be:

  • 0.09 per month for the first 5 months;
  • 0.14 per month for the next 7 months.

What is the expected standard deviation of the stock per year ##(\sigma_\text{annual})##?

Assume that returns are independently and identically distributed (iid) and therefore have zero auto-correlation.

Question 347  PE ratio, Multiples valuation

Which of the following investable assets are NOT suitable for valuation using PE multiples techniques?

Question 426  takeover

Acquirer firm plans to launch a takeover of Target firm. The deal is expected to create a present value of synergies totaling $0.5 million, but investment bank fees and integration costs with a present value of $1.5 million is expected. A 10% cash and 90% scrip offer will be made that pays the fair price for the target's shares only. Assume that the Target and Acquirer agree to the deal. The cash will be paid out of the firms' cash holdings, no new debt or equity will be raised.

Firms Involved in the Takeover
Acquirer Target
Assets ($m) 60 10
Debt ($m) 20 2
Share price ($) 10 8
Number of shares (m) 4 1

Assume that the firms' debt and equity are fairly priced, and that each firms' debts' risk, yield and values remain constant. The acquisition is planned to occur immediately, so ignore the time value of money.

Calculate the merged firm's share price and total number of shares after the takeover has been completed.

Question 451  DDM

The first payment of a constant perpetual annual cash flow is received at time 5. Let this cash flow be ##C_5## and the required return be ##r##.

So there will be equal annual cash flows at time 5, 6, 7 and so on forever, and all of the cash flows will be equal so ##C_5 = C_6 = C_7 = ...##

When the perpetuity formula is used to value this stream of cash flows, it will give a value (V) at time:

Question 466  limited liability, business structure

Which business structure or structures have the advantage of limited liability for equity investors?

Question 631  foreign exchange rate

The Australian dollar's value was:

  • 1.4875 USD per AUD on 31 August 1974.
  • 0.4890 USD per AUD on 31 March 2001.

Did the Australian dollar or against the US dollar between these dates?

Question 743  price gains and returns over time, no explanation

How many years will it take for an asset's price to triple (increase from say $1 to $3) if it grows by 5% pa?

Question 901  Basel accord

The below graph from the RBA shows the phase-in of the Basel 3 minimum regulatory capital requirements under the Basel Committee on Banking Supervision (BCBS) on the left panel and in Australia under the Australian Prudential Regulatory Authority (APRA) on the right panel.

Which of the following statements about the Basel 3 minimum regulatory capital requirements as at 2019 is NOT correct? All minimum amounts exclude the 2.5% counter-cyclical buffer.

The Basel 3 minimum regulatory capital requirement as a percent of Risk Weighted Assets (RWA) is: