Fight Finance

Question 36  DDM, perpetuity with growth

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) $127.5

(b) $125

(c) $102

(d) $101.98

(e) $100

Question 102  option, hedging

A company runs a number of slaughterhouses which supply hamburger meat to McDonalds. The company is afraid that live cattle prices will increase over the next year, even though there is widespread belief in the market that they will be stable. What can the company do to hedge against the risk of increasing live cattle prices? Which statement(s) are correct?

(i) buy call options on live cattle.

(ii) buy put options on live cattle.

(iii) sell call options on live cattle.

Select the most correct response:

(a) Only (i) is true.

(b) Only (ii) is true.

(c) Only (iii) is true.

(d) Only (i) and (ii) is true.

(e) All statements (i), (ii) and (iii) are true.

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 442  economic depreciation, no explanation

A fairly valued share's current price is $4 and it has a total required return of 30%. Dividends are paid annually and next year's dividend is expected to be $1. After that, dividends are expected to grow by 5% pa. All rates are effective annual returns.

What is the expected dividend cash flow, economic depreciation, and economic income and economic value added (EVA) that will be earned over the second year (from t=1 to t=2) and paid at the end of that year (t=2)?

(a) $1.3, -$0.26, $1.56, $0

(b) $1.25, -$0.25, $1.5, $0

(c) $1.1025, -$0.2205, $1.323, $0

(d) $1.05, -$0.21, $1.26, $0

(e) $1, -$0.2, $1.2, $0

Question 471  risk, accounting ratio

High risk firms in danger of bankruptcy tend to have:

(a) Low debt to assets ratios.

(b) High quick ratios.

(c) Low interest coverage ratios.

(d) Positive amounts of net working capital.

(e) High net profit margins.

Question 530  Annuity, annuity due, no explanation

You are promised 20 payments of $100, where the first payment is immediate (t=0) and the last is at the end of the 19th year (t=19). The effective annual discount rate is ##r##.

Which of the following equations does NOT give the correct present value of these 20 payments?

(a) ##V_0=\dfrac{\dfrac{100}{r} \left( 1- \dfrac{1}{(1+r)^{20}} \right) }{(1+r)^1} ##

(b) ##V_0=\dfrac{100}{r} \left( 1- \dfrac{1}{(1+r)^{20}} \right) (1+r)^1##

(c) ##V_0=\dfrac{100}{r} \left( 1- \dfrac{1}{(1+r)^{19}} \right) +100##

(d) ##V_0=\dfrac{100(1+r)^1}{r} \left( 1- \dfrac{1}{(1+r)^{20}} \right) ##

(e) ##V_0=100 \left( 1-(1+r)^{-19} \right) r^{-1}+100##

Question 695  utility, risk aversion, utility function

Mr Blue, Miss Red and Mrs Green are people with different utility functions. Which of the statements about the 3 utility functions is NOT correct?

(a) All rational people prefer more wealth to less.

(b) Mr Blue is risk averse.

(c) Miss Red is risk neutral.

(d) Mrs Green is risk averse.

(e) Mrs Green may enjoy gambling.

Question 850  gross domestic product, gross domestic product per capita

Below is a table showing some countries’ GDP, population and GDP per capita.

Countries' GDP and Population
	GDP	Population	GDP per capita
	USD million	millions of people	USD
United States	18,036,648	325	55,492
China	11,158,457	1,383	8,066
Japan	4,383,076	127	34,586
Germany	3,363,600	83	40,623
Norway	500,519	5	95,027

 

Source: "GDP and its breakdown at current prices in US Dollars" United Nations Statistics Division. December 2016.

Using this data only, which one of these countries’ citizens have the highest living standards?

(a) Americans

(b) Chinese

(c) Japanese

(d) Germans

(e) Norwegians

Question 863  option, binomial option pricing

A one year European-style call option has a strike price of $4. The option's underlying stock pays no dividends and currently trades at $5. The risk-free interest rate is 10% pa continuously compounded. Use a single step binomial tree to calculate the option price, assuming that the price could rise to $8 ##(u = 1.6)## or fall to $3.125 ##(d = 1/1.6)## in one year. The call option price now is:

(a) 1.336851119

(b) 1.782468159

(c) 1.836881513

(d) 1.969931972

(e) 2.030068028

Question 878  foreign exchange rate, American and European terms

If the Australian dollar quote of 0.8 USD per AUD suddenly falls to 0.7 USD per AUD, has the Australian dollar or against the US dollar?