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Question 26  APR, effective rate

A European bond paying annual coupons of 6% offers a yield of 10% pa.

Convert the yield into an effective monthly rate, an effective annual rate and an effective daily rate. Assume that there are 365 days in a year.

All answers are given in the same order:

### r_\text{eff, monthly} , r_\text{eff, yearly} , r_\text{eff, daily} ###



Question 112  CAPM, risk

According to the theory of the Capital Asset Pricing Model (CAPM), total risk can be broken into two components, systematic risk and idiosyncratic risk. Which of the following events would be considered a systematic, undiversifiable event according to the theory of the CAPM?



Question 361  CFFA

Over the next year, the management of an unlevered company plans to:

  • Make $5m in sales, $1.9m in net income and $2m in equity free cash flow (EFCF).
  • Pay dividends of $1m.
  • Complete a $1.3m share buy-back.

Assume that:

  • All amounts are received and paid at the end of the year so you can ignore the time value of money.
  • The firm has sufficient retained profits to legally pay the dividend and complete the buy back.
  • The firm plans to run a very tight ship, with no excess cash above operating requirements currently or over the next year.

How much new equity financing will the company need? In other words, what is the value of new shares that will need to be issued?



Question 482  market capitalisation of equity

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.

Image of MSFT on Google finance on 28 Nov 2014

What was MSFT's market capitalisation of equity?



Question 546  income and capital returns, interest only loan, no explanation

Which of the following statements about the capital and income returns of an interest-only loan is correct?

Assume that the yield curve (which shows total returns over different maturities) is flat and is not expected to change.

An interest-only loan's expected:



Question 628  CAPM, SML, risk

Image of CML SML graph

Assets A, B, M and ##r_f## are shown on the graphs above. Asset M is the market portfolio and ##r_f## is the risk free yield on government bonds. Assume that investors can borrow and lend at the risk free rate. Which of the below statements is NOT correct?



Question 629  yield curve, forward interest rate

Which of the following statements about yield curves is NOT correct?



Question 706  utility, risk aversion, utility function

Mr Blue, Miss Red and Mrs Green are people with different utility functions.

Note that a fair gamble is a bet that has an expected value of zero, such as paying $0.50 to win $1 in a coin flip with heads or nothing if it lands tails. Fairly priced insurance is when the expected present value of the insurance premiums is equal to the expected loss from the disaster that the insurance protects against, such as the cost of rebuilding a home after a catastrophic fire.

Which of the following statements is NOT correct?

Utility curves



Question 857  DuPont formula, accounting ratio

The DuPont formula is:

###\dfrac{\text{Net Profit}}{\text{Sales}} \times \dfrac{\text{Sales}}{\text{Total Assets}} \times \dfrac{\text{Total Assets}}{\text{Owners' Equity}}###

Which of the following statements about the DuPont formula is NOT correct?



Question 866  option, Black-Scholes-Merton option pricing

A one year European-style put option has a strike price of $4.

The option's underlying stock currently trades at $5, pays no dividends and its standard deviation of continuously compounded returns is 47% pa.

The risk-free interest rate is 10% pa continuously compounded.

Use the Black-Scholes-Merton formula to calculate the option price. The put option price now is: