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Question 3 DDM, income and capital returns

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:

Question 501 NPV, IRR, pay back period

The below graph shows a project's net present value (NPV) against its annual discount rate.

Which of the following statements is NOT correct?

Question 513 stock split, reverse stock split, stock dividend, bonus issue, rights issue

Which of the following statements is NOT correct?

Question 614 debt terminology

Question 760 time calculation, interest only loan, no explanation

Five years ago (##t=-5## years) you entered into an interest-only home loan with a principal of $500,000, an interest rate of 4.5% pa compounding monthly with a term of 25 years.

Then interest rates suddenly fall to 3% pa (##t=0##), but you continue to pay the same monthly home loan payments as you did before. Will your home loan be paid off by the end of its remaining term? If so, in how many years from now? Measure the time taken to pay off the home loan from the current time which is 5 years after the home loan was first entered into.

Assume that the lower interest rate was given to you immediately after the loan repayment at the end of year 5, which was the 60th payment since the loan was granted. Also assume that rates were and are expected to remain constant.

Question 773 CFFA, WACC, interest tax shield, DDM

Use the below information to value a levered company with constant annual perpetual cash flows from assets. The next cash flow will be generated in one year from now, so a perpetuity can be used to value this firm. Both the operating and firm free cash flows are constant (but not equal to each other).

Data on a Levered Firm with Perpetual Cash Flows
Item abbreviation	Value	Item full name
##\text{OFCF}##	$48.5m	Operating free cash flow
##\text{FFCF or CFFA}##	$50m	Firm free cash flow or cash flow from assets
##g##	0% pa	Growth rate of OFCF and FFCF
##\text{WACC}_\text{BeforeTax}##	10% pa	Weighted average cost of capital before tax
##\text{WACC}_\text{AfterTax}##	9.7% pa	Weighted average cost of capital after tax
##r_\text{D}##	5% pa	Cost of debt
##r_\text{EL}##	11.25% pa	Cost of levered equity
##D/V_L##	20% pa	Debt to assets ratio, where the asset value includes tax shields
##t_c##	30%	Corporate tax rate

What is the value of the levered firm including interest tax shields?

Question 808 Markowitz portfolio theory, portfolio return

A graph of assets’ expected returns ##(\mu)## versus standard deviations ##(\sigma)## is given in the below diagram.

Each letter corresponds to a separate coloured area. The portfolios at the boundary of the areas, on the black lines, are excluded from each area. Assume that all assets represented in this graph are fairly priced, and that all risky assets can be short-sold.

Which of the following statements about this graph and Markowitz portfolio theory is NOT correct?

Question 817 expected and historical returns, income and capital returns

Over the last year, a constant-dividend-paying stock's price fell, while it's future expected dividends and profit remained the same. Assume that:

Now is ##t=0##, last year is ##t=-1## and next year is ##t=1##;
The dividend is paid at the end of each year, the last dividend was just paid today ##(C_0)## and the next dividend will be paid next year ##(C_1)##;
Markets are efficient and the dividend discount model is suitable for valuing the stock.

Which of the following statements is NOT correct? The stock's:

Question 894 balance of payments, current account, no explanation

Below are four graphs of Australia's external position, published in the RBA's chart pack.

Assume that all assets and liabilities are debt which makes interest income and equity which makes dividend income.

Which of the following statements is NOT correct? As at the end of 2017, Australia’s:

(a) Trade surplus was roughly zero, so Australians exported as much as they imported.

(b) Net Income was negative, so Australians paid more dividends and interest to foreigners than they received. This is probably because Australia has greater gross foreign liabilities than gross foreign assets.

(c) Current account deficit means Australians have to lend to foreigners by buying foreigners’ debt and equity which represent net capital outflows out of Australia.

(d) Net foreign equity liabilities were negative (less than zero) so Australians had positive net foreign equity assets which means that Australians owned more foreign shares than foreigners owned of Australian shares.

(e) Persistent current account deficit will make its net foreign liabilities greater and greater.

Question 933 confidence interval, normal distribution

A stock has an expected return of 10% pa and you're 90% sure that over the next year, the return will be between -15% and 35%. The stock's returns are normally distributed. Note that the Z-statistic corresponding to a one-tail:

90% normal probability density function is 1.282.
95% normal probability density function is 1.645.
97.5% normal probability density function is 1.960.

What is the stock’s standard deviation of returns in percentage points per annum (pp pa)?