Fight Finance

Question 38  bond pricing

A two year Government bond has a face value of $100, a yield of 0.5% and a fixed coupon rate of 0.5%, paid semi-annually. What is its price?

(a) $100.0000

(b) $98.0346

(c) $99.0062

(d) $99.0087

(e) $99.0124

Question 196  DDM, no explanation

A share pays annual dividends. It just paid a dividend of $2. The growth rate in the dividend is 3% pa. You estimate that the stock's required return is 8% pa. Both the discount rate and growth rate are given as effective annual rates.

Using the dividend discount model, what is the share price?

(a) 25

(b) 25.72

(c) 25.75

(d) 40

(e) 41.2

Question 249  equivalent annual cash flow, effective rate conversion

Details of two different types of desserts or edible treats are given below:

• High-sugar treats like candy, chocolate and ice cream make a person very happy. High sugar treats are cheap at only $2 per day.
• Low-sugar treats like nuts, cheese and fruit make a person equally happy if these foods are of high quality. Low sugar treats are more expensive at $4 per day.

The advantage of low-sugar treats is that a person only needs to pay the dentist $2,000 for fillings and root canal therapy once every 15 years. Whereas with high-sugar treats, that treatment needs to be done every 5 years.

The real discount rate is 10%, given as an effective annual rate. Assume that there are 365 days in every year and that all cash flows are real. The inflation rate is 3% given as an effective annual rate.

Find the equivalent annual cash flow (EAC) of the high-sugar treats and low-sugar treats, including dental costs. The below choices are listed in that order.

Ignore the pain of dental therapy, personal preferences and other factors.

(a) -$332.8709, -$68.2065

(b) -$327.595, -$62.9476

(c) -$828.9808, -$808.5709

(d) -$829.6304, -$810.2613

(e) -$1,093.4153, -$1,594.5881

Question 367  CFFA, interest tax shield

There are many ways to calculate a firm's free cash flow (FFCF), also called cash flow from assets (CFFA). Some include the annual interest tax shield in the cash flow and some do not.

Which of the below FFCF formulas include the interest tax shield in the cash flow?

###(1) \quad FFCF=NI + Depr - CapEx -ΔNWC + IntExp### ###(2) \quad FFCF=NI + Depr - CapEx -ΔNWC + IntExp.(1-t_c)### ###(3) \quad FFCF=EBIT.(1-t_c )+ Depr- CapEx -ΔNWC+IntExp.t_c### ###(4) \quad FFCF=EBIT.(1-t_c) + Depr- CapEx -ΔNWC### ###(5) \quad FFCF=EBITDA.(1-t_c )+Depr.t_c- CapEx -ΔNWC+IntExp.t_c### ###(6) \quad FFCF=EBITDA.(1-t_c )+Depr.t_c- CapEx -ΔNWC### ###(7) \quad FFCF=EBIT-Tax + Depr - CapEx -ΔNWC### ###(8) \quad FFCF=EBIT-Tax + Depr - CapEx -ΔNWC-IntExp.t_c### ###(9) \quad FFCF=EBITDA-Tax - CapEx -ΔNWC### ###(10) \quad FFCF=EBITDA-Tax - CapEx -ΔNWC-IntExp.t_c###

The formulas for net income (NI also called earnings), EBIT and EBITDA are given below. Assume that depreciation and amortisation are both represented by 'Depr' and that 'FC' represents fixed costs such as rent.

###NI=(Rev - COGS - Depr - FC - IntExp).(1-t_c )### ###EBIT=Rev - COGS - FC-Depr### ###EBITDA=Rev - COGS - FC### ###Tax =(Rev - COGS - Depr - FC - IntExp).t_c= \dfrac{NI.t_c}{1-t_c}###

(a) 1, 3, 5, 7, 9.

(b) 2, 4, 6, 8, 10.

(c) 1, 4, 6, 8, 10.

(d) 2, 3, 5, 7, 9.

(e) 1, 3, 5, 8, 10.

Question 494  franking credit, personal tax on dividends, imputation tax system

A firm pays a fully franked cash dividend of $100 to one of its Australian shareholders who has a personal marginal tax rate of 15%. The corporate tax rate is 30%.

What will be the shareholder's personal tax payable due to the dividend payment?

(a) -$21.4286

(b) -$7.563

(c) $15

(d) $21.4286

(e) $78.5714

Question 704  utility, risk aversion, utility function, gamble

Mr Blue, Miss Red and Mrs Green are people with different utility functions.

Each person has $256 of initial wealth. A coin toss game is offered to each person at a casino where the player can win or lose $256. Each player can flip a coin and if they flip heads, they receive $256. If they flip tails then they will lose $256. Which of the following statements is NOT correct?

(a) All people would appear rational to an economist since they prefer more wealth to less.

(b) Mrs Green and Miss Red would appear unusual to an economist since they are not risk averse.

(c) Mr Blue's certainty equivalent of the gamble is $64. This is less than his current wealth of $256 which is why he would refuse the gamble.

(d) Miss Red's certainty equivalent of the gamble is $256. This is the same as her current wealth of $256 which is why she would be indifferent to playing or not.

(e) Mrs Green's certainty equivalent of the gamble is $512. This is more than her current wealth of $256 which is why she would love to play.

Question 793  option, hedging, delta hedging, gamma hedging, gamma, Black-Scholes-Merton option pricing

A bank buys 1000 European put options on a $10 non-dividend paying stock at a strike of $12. The bank wishes to hedge this exposure. The bank can trade the underlying stocks and European call options with a strike price of 7 on the same stock with the same maturity. Details of the call and put options are given in the table below. Each call and put option is on a single stock.

European Options on a Non-dividend Paying Stock
Description	Symbol	Put Values	Call Values
Spot price ($)	##S_0##	10	10
Strike price ($)	##K_T##	12	7
Risk free cont. comp. rate (pa)	##r##	0.05	0.05
Standard deviation of the stock's cont. comp. returns (pa)	##\sigma##	0.4	0.4
Option maturity (years)	##T##	1	1
Option price ($)	##p_0## or ##c_0##	2.495350486	3.601466138
##N[d_1]##	##\partial c/\partial S##		0.888138405
##N[d_2]##	##N[d_2]##		0.792946442
##-N[-d_1]##	##\partial p/\partial S##	-0.552034778
##N[-d_2]##	##N[-d_2]##	0.207053558
Gamma	##\Gamma = \partial^2 c/\partial S^2## or ##\partial^2 p/\partial S^2##	0.098885989	0.047577422
Theta	##\Theta = \partial c/\partial T## or ##\partial p/\partial T##	0.348152078	0.672379961

 

Which of the following statements is NOT correct?

(a) If the underlying stock price suddenly rose by $0.01, the put option price would be expected to fall by less than $0.00552034777953178.

(b) If the underlying stock price suddenly fell by $0.01, the put option price would be expected to rise by more than $0.00552034777953178.

(c) If the underlying stock price suddenly rose by $0.01, the call option price would be expected to rise by more than $0.00888138404936379.

(d) To Delta hedge the 1000 long put options, long 552.0348 stocks.

(e) To Delta and Gamma hedge the 1000 long put options, long 2078.4226 call options and short 2397.9617 stocks.

Question 862  yield curve, bond pricing, bill pricing, monetary policy, no explanation

Refer to the below graph when answering the questions.

Which of the following statements is NOT correct?

(a) The 3-month government bill yield is likely to be given as a simple interest rate.

(b) The 10-year government bond yield is likely to be given as an annualised percentage rate compounding every six months since Japanese government bonds pay semi-annual coupons.

(c) As 10-year government bond yields fell over the last few years, bond investors would have made capital gains assuming that the bonds are fixed-coupon.

(d) The Japanese yield curve is ‘inverse’ at the latest time in mid-2017.

(e) The Japanese central bank has been maintaining expansionary monetary policy over the last few years.

Question 881  Nixon Shock, Bretton Woods, foreign exchange rate, foreign exchange system history, no explanation

In the ‘Nixon Shock’ on August 15, 1971, the United States government:

(a) Floated the USD.

(b) Cancelled the international convertibility of the USD into gold.

(c) Cancelled the international convertibility of the USD into other currencies such as the GBP.

(d) Revalued the USD higher (an appreciation of the USD) against gold and other foreign currencies.

(e) Banned imports into the US.

Question 940  CAPM, DDM

A stock has a beta of 1.2. Its next dividend is expected to be $20, paid one year from now.

Dividends are expected to be paid annually and grow by 1.5% pa forever.

Treasury bonds yield 3% pa and the market portfolio's expected return is 7% pa. All returns are effective annual rates.

What is the price of the stock now?

(a) $256.41

(b) $317.46

(c) $363.64

(d) $416.67

(e) $1,333.33