A wholesale glass importer offers credit to its customers. Customers are given 30 days to pay for their goods, but if they pay within 5 days they will get a 1% discount.
What is the effective interest rate implicit in the discount being offered? Assume 365 days in a year and that all customers pay on either the 5th day or the 30th day. All rates given below are effective annual rates.
A stock was bought for $8 and paid a dividend of $0.50 one year later (at t=1 year). Just after the dividend was paid, the stock price was $7 (at t=1 year).
What were the total, capital and dividend returns given as effective annual rates? The choices are given in the same order:
##r_\text{total}##, ##r_\text{capital}##, ##r_\text{dividend}##.
A fairly priced stock has an expected return equal to the market's. Treasury bonds yield 5% pa and the market portfolio's expected return is 10% pa. What is the stock's beta?
A firm wishes to raise $50 million now. They will issue 5% pa semi-annual coupon bonds that will mature in 3 years and have a face value of $100 each. Bond yields are 6% pa, given as an APR compounding every 6 months, and the yield curve is flat.
How many bonds should the firm issue?
Which of the following terms about options are NOT synonyms?
Question 875 omitted variable bias, systematic and idiosyncratic risk, CAPM, single factor model, two factor model
The Capital Asset Pricing Model (CAPM) and the Single Index Model (SIM) are single factor models whose only risk factor is the market portfolio’s return. Say a Solar electricity generator company and a Beach bathing chair renting company are influenced by two factors, the market portfolio return and cloud cover in the sky. When it's sunny and not cloudy, both the Solar and Beach companies’ stock prices do well. When there’s dense cloud cover and no sun, both do poorly. Assume that cloud coverage risk is a systematic risk that cannot be diversified and that cloud cover has zero correlation with the market portfolio’s returns.
Which of the following statements about these two stocks is NOT correct?
The CAPM and SIM:
Question 926 mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate
The arithmetic average continuously compounded or log gross discrete return (AALGDR) on the ASX200 accumulation index over the 24 years from 31 Dec 1992 to 31 Dec 2016 is 9.49% pa.
The arithmetic standard deviation (SDLGDR) is 16.92 percentage points pa.
Assume that the log gross discrete returns are normally distributed and that the above estimates are true population statistics, not sample statistics, so there is no standard error in the sample mean or standard deviation estimates. Also assume that the standardised normal Z-statistic corresponding to a one-tail probability of 2.5% is exactly -1.96.
If you had a $1 million fund that replicated the ASX200 accumulation index, in how many years would the median dollar value of your fund first be expected to lie outside the 95% confidence interval forecast?
Use the below information to value a mature levered company with growing annual perpetual cash flows and a constant debt-to-assets ratio. The next cash flow will be generated in one year from now, so a perpetuity can be used to value this firm. The firm's debt funding comprises annual fixed coupon bonds that all have the same seniority and coupon rate. When these bonds mature, new bonds will be re-issued, and so on in perpetuity. The yield curve is flat.
| Data on a Levered Firm with Perpetual Cash Flows | ||
| Item abbreviation | Value | Item full name |
| ##\text{OFCF}_1## | $12.5m | Operating free cash flow at time 1 |
| ##\text{FFCF}_1 \text{ or }\text{CFFA}_1## | $14m | Firm free cash flow or cash flow from assets at time 1 |
| ##\text{EFCF}_1## | $11m | Equity free cash flow at time 1 |
| ##\text{BondCoupons}_1## | $1.2m | Bond coupons paid to debt holders at time 1 |
| ##g## | 2% pa | Growth rate of OFCF, FFCF, EFCF and Debt cash flow |
| ##\text{WACC}_\text{BeforeTax}## | 9% pa | Weighted average cost of capital before tax |
| ##\text{WACC}_\text{AfterTax}## | 8.25% pa | Weighted average cost of capital after tax |
| ##r_\text{D}## | 5% pa | Bond yield |
| ##r_\text{EL}## | 13% pa | Cost or required return of levered equity |
| ##D/V_L## | 50% pa | Debt to assets ratio, where the asset value includes tax shields |
| ##n_\text{shares}## | 1m | Number of shares |
| ##t_c## | 30% | Corporate tax rate |
Which of the following statements is NOT correct?