If a project's net present value (NPV) is zero, then its internal rate of return (IRR) will be:
Question 50 DDM, stock pricing, inflation, real and nominal returns and cash flows
Most listed Australian companies pay dividends twice per year, the 'interim' and 'final' dividends, which are roughly 6 months apart.
You are an equities analyst trying to value the company BHP. You decide to use the Dividend Discount Model (DDM) as a starting point, so you study BHP's dividend history and you find that BHP tends to pay the same interim and final dividend each year, and that both grow by the same rate.
You expect BHP will pay a $0.55 interim dividend in six months and a $0.55 final dividend in one year. You expect each to grow by 4% next year and forever, so the interim and final dividends next year will be $0.572 each, and so on in perpetuity.
Assume BHP's cost of equity is 8% pa. All rates are quoted as nominal effective rates. The dividends are nominal cash flows and the inflation rate is 2.5% pa.
What is the current price of a BHP share?
Which one of the following bonds is trading at par?
Question 554 inflation, real and nominal returns and cash flows
On his 20th birthday, a man makes a resolution. He will put $30 cash under his bed at the end of every month starting from today. His birthday today is the first day of the month. So the first addition to his cash stash will be in one month. He will write in his will that when he dies the cash under the bed should be given to charity.
If the man lives for another 60 years, how much money will be under his bed if he dies just after making his last (720th) addition?
Also, what will be the real value of that cash in today's prices if inflation is expected to 2.5% pa? Assume that the inflation rate is an effective annual rate and is not expected to change.
The answers are given in the same order, the amount of money under his bed in 60 years, and the real value of that money in today's prices.
Which of the below formulas gives the profit ##(\pi)## from being short a put option? Let the underlying asset price at maturity be ##S_T##, the exercise price be ##X_T## and the option price be ##f_{LP,0}##. Note that ##S_T##, ##X_T## and ##f_{LP,0}## are all positive numbers.
Question 745 real and nominal returns and cash flows, inflation, income and capital returns
If the nominal gold price is expected to increase at the same rate as inflation which is 3% pa, which of the following statements is NOT correct?
Question 760 time calculation, interest only loan, no explanation
Five years ago (##t=-5## years) you entered into an interest-only home loan with a principal of $500,000, an interest rate of 4.5% pa compounding monthly with a term of 25 years.
Then interest rates suddenly fall to 3% pa (##t=0##), but you continue to pay the same monthly home loan payments as you did before. Will your home loan be paid off by the end of its remaining term? If so, in how many years from now? Measure the time taken to pay off the home loan from the current time which is 5 years after the home loan was first entered into.
Assume that the lower interest rate was given to you immediately after the loan repayment at the end of year 5, which was the 60th payment since the loan was granted. Also assume that rates were and are expected to remain constant.
A firm is about to conduct a 2-for-7 rights issue with a subscription price of $10 per share. They haven’t announced the capital raising to the market yet and the share price is currently $13 per share. Assume that every shareholder will exercise their rights, the cash raised will simply be put in the bank, and the rights issue is completed so quickly that the time value of money can be ignored. Disregard signalling, taxes and agency-related effects.
Which of the following statements about the rights issue is NOT correct? After the rights issue is completed:
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?