Fight Finance

Question 323  foreign exchange rate, monetary policy, American and European terms

The market expects the Reserve Bank of Australia (RBA) to increase the policy rate by 25 basis points at their next meeting.

As expected, the RBA increases the policy rate by 25 basis points.

What do you expect to happen to Australia's exchange rate in the short term? The Australian dollar will:

(a) Appreciate against the USD, so the 'American terms' quote of the AUD (USD per AUD) will increase.

(b) Depreciate against the USD, so the 'American terms' quote of the AUD (USD per AUD) will decrease.

(c) Appreciate against the USD, so the 'American terms' quote of the AUD (USD per AUD) will decrease.

(d) Depreciate against the USD, so the 'American terms' quote of the AUD (USD per AUD) will increase.

(e) Be unaffected by the change in the policy rate, so the exchange rate will remain the same.

Question 375  interest tax shield, CFFA

One formula for calculating a levered firm's free cash flow (FFCF, or CFFA) is to use net operating profit after tax (NOPAT).

###\begin{aligned} FFCF &= NOPAT + Depr - CapEx -\Delta NWC \\ &= (Rev - COGS - Depr - FC)(1-t_c) + Depr - CapEx -\Delta NWC \\ \end{aligned} \\###

Does this annual FFCF or the annual interest tax shield?

Question 613  debt terminology

You own a debt asset. Are you a or a ?

Question 645  option, no explanation

A trader buys one crude oil European style call option contract on the CME expiring in one year with an exercise price of $44 per barrel for a price of $6.64. The crude oil spot price is $40.33. If the trader doesn’t close out her contract before maturity, then at maturity she will have the:

(a) Obligation to buy the underlying oil at $44 per barrel.

(b) Obligation to sell the underlying oil at $44 per barrel.

(c) Right to buy the underlying oil at $44 per barrel if she wants.

(d) Right to sell the underlying oil at $44 per barrel if she wants.

(e) Obligation to buy the underlying oil at $44 per barrel if her counter party chooses to sell it.

Question 662  APR, effective rate, effective rate conversion, no explanation

Which of the following interest rate labels does NOT make sense?

(a) Annualised percentage rate compounding per month.

(b) Effective monthly rate compounding per year.

(c) Annualised percentage rate compounding per year.

(d) Effective annual rate compounding per year.

(e) Annualised percentage rate compounding semi-annually.

Question 672  CAPM, beta

A stock has a beta of 1.5. The market's expected total return is 10% pa and the risk free rate is 5% pa, both given as effective annual rates.

What do you think will be the stock's expected return over the next year, given as an effective annual rate?

(a) 5% pa

(b) 7.5% pa

(c) 10% pa

(d) 12.5% pa

(e) 20% pa

Question 703  utility, risk aversion, utility function, gamble

Mr Blue, Miss Red and Mrs Green are people with different utility functions.

Each person has $500 of initial wealth. A coin toss game is offered to each person at a casino where the player can win or lose $500. Each player can flip a coin and if they flip heads, they receive $500. If they flip tails then they will lose $500. Which of the following statements is NOT correct?

(a) All people prefer more rather than less wealth which is rational.

(b) Mr Blue is risk averse, Miss Red is risk neutral and Mrs Green is risk loving.

(c) Mr Blue's certainty equivalent of the gamble is $225. This is less than his current $500 which is why he would dislike the gamble.

(d) Miss Red's certainty equivalent of the gamble is $500. This is the same as her current $500 which is why she would be indifferent to gambling.

(e) Mrs Green's certainty equivalent of the gamble is $793.70. This is more than her current $500 which is why she would like the gamble.

Question 763  multi stage growth model, DDM

A stock is expected to pay its first dividend of $20 in 3 years (t=3), which it will continue to pay for the next nine years, so there will be ten $20 payments altogether with the last payment in year 12 (t=12).

From the thirteenth year onward, the dividend is expected to be 4% more than the previous year, forever. So the dividend in the thirteenth year (t=13) will be $20.80, then $21.632 in year 14, and so on forever. The required return of the stock is 10% pa. All rates are effective annual rates. Calculate the current (t=0) stock price.

(a) $202.7888

(b) $212.0218

(c) $233.35

(d) $448.2298

(e) $469.558

Question 914  bill pricing, money market, return types

A bank bill was bought for $99,000 and sold for $100,000 thirty (30) days later. There are 365 days in the year. Which of the following formulas gives the simple interest rate per annum over those 30 days?

(a) ##12.28956229\% = \left( \dfrac{100,000}{99,000} - 1 \right) \times (365/30)##

(b) ##13.00694446\% = \left( \dfrac{100,000}{99,000} \right)^{365/30} -1##

(c) ##12.60944895\% = \left( \left( \dfrac{100,000}{99,000} \right)^{(365/2)/30} -1 \right) \times 2##

(d) ##12.2904215\% = \left( \left( \dfrac{100,000}{99,000} \right)^{(365/12)/30} -1 \right) \times 12##

(e) ##12.22790862\% = \ln \left( \dfrac{100,000}{99,000} \right) \times 365/30##

Note: To help you identify which is the correct answer without doing any calculations yourself, the formulas used to calculate the numbers are given.

Question 932  confidence interval, normal distribution

A stock's returns are normally distributed with a mean of 10% pa and a standard deviation of 20 percentage points pa. What is the 95% confidence interval of returns over the next year? 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.

The 95% confidence interval of annual returns is between:

(a) 30% and -10% pa.

(b) 32.9% and -32.9% pa.

(c) 35.64% and -15.64% pa.

(d) 42.9% and -22.9% pa.

(e) 49.2% and -29.2% pa.