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 124  option, hedging

You operate a cattle farm that supplies hamburger meat to the big fast food chains. You buy a lot of grain to feed your cattle, and you sell the fully grown cattle on the livestock market.

You're afraid of adverse movements in grain and livestock prices. What options should you buy to hedge your exposures in the grain and cattle livestock markets?

Select the most correct response:

(a) Buy calls on grain, buy calls on cattle livestock.

(b) Buy calls on grain, buy puts on cattle livestock.

(c) Buy puts on grain, buy calls on cattle livestock.

(d) Buy puts on grain, buy puts on cattle livestock.

(e) Statements (a) and (d) are both correct.

Question 331  DDM, income and capital returns

The following equation is the Dividend Discount Model, also known as the 'Gordon Growth Model' or the 'Perpetuity with growth' equation.

### p_0= \frac{c_1}{r-g} ###

Which expression is equal to the expected dividend return?

(a) ##(c_1/p_0 ) -1##

(b) ##(p_1/p_0) -1##

(c) ##(c_5/c_4) -1##

(d) ##c_3/p_2##

(e) ##(p_1-p_0)/p_0##

Question 369  interest tax shield, CFFA

One formula for calculating a levered firm's free cash flow (FFCF, or CFFA) is to use earnings before interest and tax (EBIT).

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

Does this annual FFCF or the annual interest tax shield?

Question 373  debt terminology

Which of the following statements is NOT correct? Lenders:

(a) Are long debt.

(b) Invest in debt.

(c) Are owed money.

(d) Provide debt funding.

(e) Have debt liabilities.

Question 394  real option, option

According to option theory, it's rational for students to submit their assignments as or as possible?

Question 557  portfolio weights, portfolio return

An investor wants to make a portfolio of two stocks A and B with a target expected portfolio return of 6% pa.

• Stock A has an expected return of 5% pa.
• Stock B has an expected return of 10% pa.

What portfolio weights should the investor have in stocks A and B respectively?

(a) 80%, 20%

(b) 60%, 40%

(c) 40%, 60%

(d) 20%, 80%

(e) 20%, 20%

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 935  real estate, NPV, perpetuity with growth, multi stage growth model, DDM

You're thinking of buying an investment property that costs $1,000,000. The property's rent revenue over the next year is expected to be $50,000 pa and rent expenses are $20,000 pa, so net rent cash flow is $30,000. Assume that net rent is paid annually in arrears, so this next expected net rent cash flow of $30,000 is paid one year from now.

The year after, net rent is expected to fall by 2% pa. So net rent at year 2 is expected to be $29,400 (=30,000*(1-0.02)^1).

The year after that, net rent is expected to rise by 1% pa. So net rent at year 3 is expected to be $29,694 (=30,000*(1-0.02)^1*(1+0.01)^1).

From year 3 onwards, net rent is expected to rise at 2.5% pa forever. So net rent at year 4 is expected to be $30,436.35 (=30,000*(1-0.02)^1*(1+0.01)^1*(1+0.025)^1).

Assume that the total required return on your investment property is 6% pa. Ignore taxes. All returns are given as effective annual rates.

What is the net present value (NPV) of buying the investment property?

(a) $1,190,459.24

(b) $809,540.76

(c) $768,212.01

(d) -$231,787.99

(e) -$190,459.24

Question 988  variance, covariance, beta, CAPM, risk, no explanation

Price Data Time Series
Sourced from Yahoo Finance Historical Price Data
Date	S&P500 Index (^GSPC)						Apple (AAPL)
	Open	High	Low	Close	Adj close		Open	High	Low	Close	Adj close
2007, Wed 3 Jan	1418	1429	1408	1417	1417		12.33	12.37	11.7	11.97	10.42
2008, Wed 2 Jan	1468	1472	1442	1447	1447		28.47	28.61	27.51	27.83	24.22
2009, Fri 2 Jan	903	935	899	932	932		12.27	13.01	12.17	12.96	11.28
2010, Mon 4 Jan	1117	1134	1117	1133	1133		30.49	30.64	30.34	30.57	26.6
Source: Yahoo Finance.

 

Which of the following statements about the above table which is used to calculate Apple's equity beta is NOT correct?

(a) Adjusted closing prices add back dividends and reverse the effect of stock splits.

(b) Apple's effective annual total return between the market close on 2 January 2008 and 2 January 2009 was -0.534269 (=(24.22-11.28)/24.22).

(c) Sample variance of the S&P500's effective annual total returns over the 3 year period was 0.084452.

(d) Sample covariance of effective total annual returns between Apple and the S&P500 index over the 3 year period was 0.041131.

(e) Apple's equity beta of annual total returns over the 3 year period was 3.530767.