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 107  interest only loan

You want to buy an apartment worth $300,000. You have saved a deposit of $60,000.

The bank has agreed to lend you $240,000 as an interest only mortgage loan with a term of 30 years. The interest rate is 6% pa and is not expected to change. What will be your monthly payments?

(a) 17,435.74

(b) 1,438.92

(c) 1,414.49

(d) 1,200.00

(e) 666.67

Question 166  DDM, no explanation

A stock pays annual dividends. It just paid a dividend of $3. The growth rate in the dividend is 4% 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) 30

(b) 31.16

(c) 31.2

(d) 50

(e) 52

Question 287  bond pricing

A 30 year Japanese government bond was just issued at par with a yield of 1.7% pa. The fixed coupon payments are semi-annual. The bond has a face value of $100.

Six months later, just after the first coupon is paid, the yield of the bond increases to 2% pa. What is the bond's new price?

(a) $89.5717

(b) $89.6632

(c) $90.5598

(d) $93.3393

(e) $100.0000

Question 349  CFFA, depreciation tax shield

Which one of the following will decrease net income (NI) but increase cash flow from assets (CFFA) in this year for a tax-paying firm, all else remaining constant?

Remember:

###NI = (Rev-COGS-FC-Depr-IntExp).(1-t_c )### ###CFFA=NI+Depr-CapEx - \Delta NWC+IntExp###

(a) An increase in revenue (Rev).

(b) An increase in rent expense (part of fixed costs, FC).

(c) An increase in depreciation expense (Depr).

(d) An decrease in net working capital (ΔNWC).

(e) An increase in dividends.

Question 430  option, no explanation

A European call option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars.

What is an expression for the payoff at maturity ##(f_T)## in dollars from having written (being short) the call option?

(a) ##\min(S_T - K, 0)##.

(b) ##-\min(S_T - K, 0)##.

(c) ##\max(K-S_T, 0)##.

(d) ##-\max(K-S_T, 0)##.

(e)##-\max(S_T-K, 0)##.

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 750  PE ratio, Multiples valuation

Itau Unibanco is a major listed bank in Brazil with a market capitalisation of equity equal to BRL 85.744 billion, EPS of BRL 3.96 and 2.97 billion shares on issue.

Banco Bradesco is another major bank with total earnings of BRL 8.77 billion and 2.52 billion shares on issue.

Estimate Banco Bradesco's current share price using a price-earnings multiples approach assuming that Itau Unibanco is a comparable firm.

Note that BRL is the Brazilian Real, their currency. Figures sourced from Google Finance on the market close of the BVMF on 24 July 2015.

(a) BRL 28.87

(b) BRL 25.372

(c) BRL 22.1

(d) BRL 21.653

(e) BRL 21.528

Question 813  market efficiency

The famous investor Warren Buffett is one of few portfolio managers who appears to have consistently beaten the market. His company Berkshire Hathaway (BRK) appears to have outperformed the US S&P500 market index, shown in the graph below.

Read the below statements about Warren Buffett and the implications for the Efficient Markets Hypothesis (EMH) theory of Eugene Fama. Assume that the first sentence is true. Analyse the second sentence and select the answer option which is NOT correct. In other words, find the false statement in the second sentence.

(a) Buffett is clever and by reading the news and financial reports he is able to buy under-priced stocks and sell over-priced stocks. This provides evidence for rejecting the semi-strong and strong form EMH.

(b) Buffett was lucky, his strategy happened to be the right one, not due to its merits, just by chance. This provides no evidence for or against the weak, semi-strong or strong form EMH.

(c) Buffett’s investment strategy exposes investors to higher undiversifiable risk than the market and therefore deserves a higher return. This provides no evidence for or against the weak, semi-strong or strong form EMH.

(d) Buffett is an insider trader and is able to make money from his private information. This provides evidence for rejecting the semi-strong and strong form EMH. (Note: Warren Buffett is not an insider trader, he is an honest philanthropist, but assume the contrary in this answer option).

(e) Buffett may not have beaten the market because the graphs ignore dividends - the S&P500 is the price index rather than the accumulation index and BRK pays no dividends, so even though BRK has a higher capital return than the S&P500, the total returns could be equal. This provides no evidence for or against the weak, semi-strong or strong form EMH.

Question 946  stock split, bonus issue, stock dividend

A 1-for-4 bonus issue is equivalent to a 4-for-1 stock split or a 25% stock dividend. or ?