Question 35 bond pricing, zero coupon bond, term structure of interest rates, forward interest rate
A European company just issued two bonds, a
- 1 year zero coupon bond at a yield of 8% pa, and a
- 2 year zero coupon bond at a yield of 10% pa.
What is the company's forward rate over the second year (from t=1 to t=2)? Give your answer as an effective annual rate, which is how the above bond yields are quoted.
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 ##?
The required return of a project is 10%, given as an effective annual rate. Assume that the cash flows shown in the table are paid all at once at the given point in time.
What is the Net Present Value (NPV) of the project?
| Project Cash Flows | |
| Time (yrs) | Cash flow ($) |
| 0 | -100 |
| 1 | 11 |
| 2 | 121 |
A firm has a debt-to-assets ratio of 50%. The firm then issues a large amount of debt to raise money for new projects of similar market risk to the company's existing projects. Assume a classical tax system. Which statement is correct?
A share just paid its semi-annual dividend of $10. The dividend is expected to grow at 2% every 6 months forever. This 2% growth rate is an effective 6 month rate. Therefore the next dividend will be $10.20 in six months. The required return of the stock is 10% pa, given as an effective annual rate.
What is the price of the share now?
A stock is expected to pay the following dividends:
| Cash Flows of a Stock | ||||||
| Time (yrs) | 0 | 1 | 2 | 3 | 4 | ... |
| Dividend ($) | 2 | 2 | 2 | 10 | 3 | ... |
After year 4, the dividend will grow in perpetuity at 4% pa. The required return on the stock is 10% pa. Both the growth rate and required return are given as effective annual rates.
What will be the price of the stock in 5 years (t = 5), just after the dividend at that time has been paid?
Which of the below statements about effective rates and annualised percentage rates (APR's) is NOT correct?
Read the following financial statements and calculate the firm's free cash flow over the 2014 financial year.
| UBar Corp | ||
| Income Statement for | ||
| year ending 30th June 2014 | ||
| $m | ||
| Sales | 293 | |
| COGS | 200 | |
| Rent expense | 15 | |
| Gas expense | 8 | |
| Depreciation | 10 | |
| EBIT | 60 | |
| Interest expense | 0 | |
| Taxable income | 60 | |
| Taxes | 18 | |
| Net income | 42 | |
| UBar Corp | ||
| Balance Sheet | ||
| as at 30th June | 2014 | 2013 |
| $m | $m | |
| Assets | ||
| Cash | 30 | 29 |
| Accounts receivable | 5 | 7 |
| Pre-paid rent expense | 1 | 0 |
| Inventory | 50 | 46 |
| PPE | 290 | 300 |
| Total assets | 376 | 382 |
| Liabilities | ||
| Trade payables | 20 | 18 |
| Accrued gas expense | 3 | 2 |
| Non-current liabilities | 0 | 0 |
| Contributed equity | 212 | 212 |
| Retained profits | 136 | 150 |
| Asset revaluation reserve | 5 | 0 |
| Total L and OE | 376 | 382 |
Note: all figures are given in millions of dollars ($m).
The firm's free cash flow over the 2014 financial year was:
Which one of the following statements is NOT correct? A 1-for-4 bonus issue:
Which type of business organisation has the most checks and balances against the detrimental effects of the principal-agent problem since it's potentially the most exposed?