The following equation is the Dividend Discount Model, also known as the 'Gordon Growth Model' or the 'Perpetuity with growth' equation.
### P_{0} = \frac{C_1}{r_{\text{eff}} - g_{\text{eff}}} ###
What would you call the expression ## C_1/P_0 ##?
A stock pays semi-annual dividends. It just paid a dividend of $10. The growth rate in the dividend is 1% every 6 months, given as an effective 6 month rate. You estimate that the stock's required return is 21% pa, as an effective annual rate.
Using the dividend discount model, what will be the share price?
Question 413 CFFA, interest tax shield, depreciation tax shield
There are many ways to calculate a firm's free cash flow (FFCF), also called cash flow from assets (CFFA).
One method is to use the following formulas to transform net income (NI) into FFCF including interest and depreciation tax shields:
###FFCF=NI + Depr - CapEx -ΔNWC + IntExp###
###NI=(Rev - COGS - Depr - FC - IntExp).(1-t_c )###
Another popular method is to use EBITDA rather than net income. EBITDA is defined as:
###EBITDA=Rev - COGS - FC###
One of the below formulas correctly calculates FFCF from EBITDA, including interest and depreciation tax shields, giving an identical answer to that above. Which formula is correct?
The below screenshot of Commonwealth Bank of Australia's (CBA) details were taken from the Google Finance website on 7 Nov 2014. Some information has been deliberately blanked out.
What was CBA's backwards-looking price-earnings ratio?
You have $100,000 in the bank. The bank pays interest at 10% pa, given as an effective annual rate.
You wish to consume half as much now (t=0) as in one year (t=1) and have nothing left in the bank at the end.
How much can you consume at time zero and one? The answer choices are given in the same order.
What is the covariance of a variable X with itself?
The cov(X, X) or ##\sigma_{X,X}## equals:
The price of gold is currently $700 per ounce. The forward price for delivery in 1 year is $800. An arbitrageur can borrow money at 10% per annum given as an effective discrete annual rate. Assume that gold is fairly priced and the cost of storing gold is zero.
What is the best way to conduct an arbitrage in this situation? The best arbitrage strategy requires zero capital, has zero risk and makes money straight away. An arbitrageur should sell 1 forward on gold and:
Question 721 mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate
Fred owns some Commonwealth Bank (CBA) shares. He has calculated CBA’s monthly returns for each month in the past 20 years using this formula:
###r_\text{t monthly}=\ln \left( \dfrac{P_t}{P_{t-1}} \right)###He then took the arithmetic average and found it to be 1% per month using this formula:
###\bar{r}_\text{monthly}= \dfrac{ \displaystyle\sum\limits_{t=1}^T{\left( r_\text{t monthly} \right)} }{T} =0.01=1\% \text{ per month}###He also found the standard deviation of these monthly returns which was 5% per month:
###\sigma_\text{monthly} = \dfrac{ \displaystyle\sum\limits_{t=1}^T{\left( \left( r_\text{t monthly} - \bar{r}_\text{monthly} \right)^2 \right)} }{T} =0.05=5\%\text{ per month}###Which of the below statements about Fred’s CBA shares is NOT correct? Assume that the past historical average return is the true population average of future expected returns.