A share was bought for $20 (at t=0) and paid its annual dividend of $3 one year later (at t=1). Just after the dividend was paid, the share price was $16 (at t=1). What was the total return, capital return and income return? Calculate your answers as effective annual rates.
The choices are given in the same order: ## r_\text{total},r_\text{capital},r_\text{income} ##.
A stock pays annual dividends which are expected to continue forever. It just paid a dividend of $10. The growth rate in the dividend is 2% pa. You estimate that the stock's required return is 10% pa. Both the discount rate and growth rate are given as effective annual rates. Using the dividend discount model, what will be the share price?
A company has:
- 10 million common shares outstanding, each trading at a price of $90.
- 1 million preferred shares which have a face (or par) value of $100 and pay a constant dividend of 9% of par. They currently trade at a price of $120 each.
- Debentures that have a total face value of $60,000,000 and a yield to maturity of 6% per annum. They are publicly traded and their market price is equal to 90% of their face value.
- The risk-free rate is 5% and the market return is 10%.
- Market analysts estimate that the company's common stock has a beta of 1.2. The corporate tax rate is 30%.
What is the company's after-tax Weighted Average Cost of Capital (WACC)? Assume a classical tax system.
Fundamentalists who analyse company financial reports and news announcements (but who don't have inside information) will make positive abnormal returns if:
The following equation is the Dividend Discount Model, also known as the 'Gordon Growth Model' or the 'Perpetuity with growth' equation.
###P_0=\frac{d_1}{r-g}###
A stock pays dividends annually. It just paid a dividend, but the next dividend (##d_1##) will be paid in one year.
According to the DDM, what is the correct formula for the expected price of the stock in 2.5 years?
Question 701 utility, risk aversion, utility function, gamble
Mr Blue, Miss Red and Mrs Green are people with different utility functions.
Each person has $50 of initial wealth. A coin toss game is offered to each person at a casino where the player can win or lose $50. Each player can flip a coin and if they flip heads, they receive $50. If they flip tails then they will lose $50. Which of the following statements is NOT correct?
A firm wishes to raise $100 million now. The firm's current market value of equity is $300m and the market price per share is $5. They estimate that they'll be able to issue shares in a rights issue at a subscription price of $4. All answers are rounded to 6 decimal places. Ignore the time value of money and assume that all shareholders exercise their rights. Which of the following statements is NOT correct?
Question 890 foreign exchange rate, monetary policy, no explanation
The market expects the Reserve Bank of Australia (RBA) to increase the policy rate by 25 basis points at their next meeting. The current exchange rate is 0.8 USD per AUD.
Then unexpectedly, the RBA announce that they will increase the policy rate by 50 basis points due to increased fears of inflation.
What do you expect to happen to Australia's exchange rate on the day when the surprise announcement is made? The Australian dollar is likely to suddenly:
Suppose the current Australian exchange rate is 0.8 USD per AUD.
If you think that the AUD will appreciate against the USD, contrary to the rest of the market, how could you profit? Right now you should: