The following equation is called the Dividend Discount Model (DDM), Gordon Growth Model or the perpetuity with growth formula: ### P_0 = \frac{ C_1 }{ r - g } ###
What is ##g##? The value ##g## is the long term expected:
All things remaining equal, the variance of a portfolio of two positively-weighted stocks rises as:
Your credit card shows a $600 debt liability. The interest rate is 24% pa, payable monthly. You can't pay any of the debt off, except in 6 months when it's your birthday and you'll receive $50 which you'll use to pay off the credit card. If that is your only repayment, how much will the credit card debt liability be one year from now?
A three year bond has a fixed coupon rate of 12% pa, paid semi-annually. The bond's yield is currently 6% pa. The face value is $100. What is its price?
Question 381 Merton model of corporate debt, option, real option
In the Merton model of corporate debt, buying a levered company's debt is equivalent to buying risk free government bonds and:
The CAPM can be used to find a business's expected opportunity cost of capital:
###r_i=r_f+β_i (r_m-r_f)###
What should be used as the risk free rate ##r_f##?
A large proportion of a levered firm's assets is cash held at the bank. The firm is financed with half equity and half debt.
Which of the following statements about this firm's enterprise value (EV) and total asset value (V) is NOT correct?
Question 415 income and capital returns, real estate, no explanation
You just bought a residential apartment as an investment property for $500,000.
You intend to rent it out to tenants. They are ready to move in, they would just like to know how much the monthly rental payments will be, then they will sign a twelve-month lease.
You require a total return of 8% pa and a rental yield of 5% pa.
What would the monthly paid-in-advance rental payments have to be this year to receive that 5% annual rental yield?
Also, if monthly rental payments can be increased each year when a new lease agreement is signed, by how much must you increase rents per year to realise the 8% pa total return on the property?
Ignore all taxes and the costs of renting such as maintenance costs, real estate agent fees, utilities and so on. Assume that there will be no periods of vacancy and that tenants will promptly pay the rental prices you charge.
Note that the first rental payment will be received at t=0. The first lease agreement specifies the first 12 equal payments from t=0 to 11. The next lease agreement can have a rental increase, so the next twelve equal payments from t=12 to 23 can be higher than previously, and so on forever.
Mr Blue, Miss Red and Mrs Green are people with different utility functions. Which of the statements about the 3 utility functions is NOT correct?
Below is a graph of 3 peoples’ utility functions, Mr Blue (U=W^(1/2) ), Miss Red (U=W/10) and Mrs Green (U=W^2/1000). Assume that each of them currently have $50 of wealth.
Which of the following statements about them is NOT correct?
(a) Mr Blue would prefer to invest his wealth in a well diversified portfolio of stocks rather than a single stock, assuming that all stocks had the same total risk and return.