Fight Finance

Question 32  time calculation, APR

You really want to go on a back packing trip to Europe when you finish university. Currently you have $1,500 in the bank. Bank interest rates are 8% pa, given as an APR compounding per month. If the holiday will cost $2,000, how long will it take for your bank account to reach that amount?

(a) -3.74 years

(b) 1.81 years

(c) 3.33 years

(d) 3.61 years

(e) 3.74 years

Question 41  DDM, income and capital returns

The following is the Dividend Discount Model (DDM) used to price stocks:

### P_0 = \frac{d_1}{r-g} ###

Assume that the assumptions of the DDM hold and that the time period is measured in years.

Which of the following is equal to the expected dividend in 3 years, ## d_3 ##?

(a) ## d_1(1+g)^3 ##

(b) ## P_3(r-g) ##

(c) ## d_2(1+g)^2 ##

(d) ## P_0(1+g)^3(r-g) ##

(e) ## P_0(1+g)^2(r-g) ##

Question 68  WACC, CFFA, capital budgeting

A manufacturing company is considering a new project in the more risky services industry. The cash flows from assets (CFFA) are estimated for the new project, with interest expense excluded from the calculations. To get the levered value of the project, what should these unlevered cash flows be discounted by?

Assume that the manufacturing firm has a target debt-to-assets ratio that it sticks to.

(a) The manufacturing firm's before-tax WACC.

(b) The manufacturing firm's after-tax WACC.

(c) A services firm's before-tax WACC, assuming that the services firm has the same debt-to-assets ratio as the manufacturing firm.

(d) A services firm's after-tax WACC, assuming that the services firm has the same debt-to-assets ratio as the manufacturing firm.

(e) The services firm's levered cost of equity.

Question 165  DDM, PE ratio, payout ratio

For certain shares, the forward-looking Price-Earnings Ratio (##P_0/EPS_1##) is equal to the inverse of the share's total expected return (##1/r_\text{total}##). For what shares is this true?

Use the general accounting definition of 'payout ratio' which is dividends per share (DPS) divided by earnings per share (EPS) and assume that all cash flows, earnings and rates are real rather than nominal.

A company's forward-looking PE ratio will be the inverse of its total expected return on equity when it has a:

(a) 100% payout ratio and high expected growth in earnings and dividends.

(b) 100% payout ratio and negative expected growth in earnings and dividends.

(c) 100% payout ratio and no expected growth in earnings or dividends.

(d) 0% payout ratio and no expected growth in earnings or dividends.

(e) 0% payout ratio and negative expected growth in earnings and dividends.

Question 429  takeover

In a takeover deal where the offer is 100% scrip (shares), the merged firm's number of shares will be equal to the sum of the acquirer and target firms' original number of shares. or ?

Question 466  limited liability, business structure

Which business structure or structures have the advantage of limited liability for equity investors?

(a) Sole traders.

(b) Partnerships.

(c) Corporations.

(d) All of the above.

(e) None of the above

Question 493  PE ratio

A firm has 2m shares and a market capitalisation of equity of $30m. The firm just announced earnings of $5m and paid an annual dividend of $0.75 per share.

What is the firm's (backward looking) price/earnings (PE) ratio?

(a) 2.5

(b) 3

(c) 6

(d) 15

(e) 20

Question 690  option

A trader just bought a European style put option on CBA stock. The current option premium is $2, the exercise price is $75, the option matures in one year and the spot CBA stock price is $74.

Which of the following statements is NOT correct?

(a) The long trader paid the option premium at the start.

(b) The option is 'out of the money' at the start.

(c) The long trader wishes for the underlying CBA stock price to fall.

(d) The option can only be exercised at maturity.

(e) If the stock price falls to $60 at maturity, then the long trader can buy the underlying stock for $60, exercise his option to sell the underlying stock to his counterparty for $75, making a payoff at maturity of $15 and a profit of $13.

Question 883  monetary policy, impossible trinity, foreign exchange rate

It’s often thought that the ideal currency or exchange rate regime would:

1. Be fixed against the USD;

2. Be convertible to and from USD for traders and investors so there are open goods, services and capital markets, and;

3. Allow independent monetary policy set by the country’s central bank, independent of the US central bank. So the country can set its own interest rate independent of the US Federal Reserve’s USD interest rate.

However, not all of these characteristics can be achieved. One must be sacrificed. This is the 'impossible trinity'.

Which of the following exchange rate regimes sacrifices convertibility?

(a) Australia’s dollar, AUD.

(b) The Chinese territory Hong Kong’s dollar, HKD.

(c) Mainland China’s Renminbi, RMB.

(d) Panama’s currency.

(e) Saudi Arabia’s Riyal, SAR.

Question 900  Basel accord

Which of the following statements about the Basel 3 minimum capital requirements is NOT correct? Common equity tier 1 (CET1) comprises the highest quality components of capital that fully satisfy all of the following characteristics:

(a) Provide a permanent and unrestricted commitment of funds;

(b) Are freely available to absorb losses;

(c) Impose unavoidable servicing charges against earnings;

(d) Rank behind the claims of depositors and other creditors in the event of winding-up of the issuer.