A stock is expected to pay the following dividends:

Cash Flows of a Stock | ||||||

Time (yrs) | 0 | 1 | 2 | 3 | 4 | ... |

Dividend ($) | 0.00 | 1.00 | 1.05 | 1.10 | 1.15 | ... |

After year 4, the annual dividend will grow in perpetuity at 5% pa, so;

- the dividend at t=5 will be $1.15(1+0.05),
- the dividend at t=6 will be $1.15(1+0.05)^2, and so on.

The required return on the stock is 10% pa. Both the growth rate and required return are given as effective annual rates. What is the current price of the stock?

**Question 154** implicit interest rate in wholesale credit, no explanation

A wholesale vitamin supplements store offers credit to its customers. Customers are given 30 days to pay for their goods, but if they pay within 5 days they will get a 1% discount.

What is the effective interest rate implicit in the discount being offered? Assume 365 days in a year and that all customers pay on either the 5th day or the 30th day. All of the below answer choices are given as effective annual interest rates.

Acquirer firm plans to launch a takeover of Target firm. The deal is expected to create a present value of synergies totaling $**105** million. A **cash** offer will be made that pays the fair price for the target's shares plus **75**% of the total synergy value. The cash will be paid out of the firm's cash holdings, no new debt or equity will be raised.

Firms Involved in the Takeover | ||

Acquirer | Target | |

Assets ($m) | 6,000 | 700 |

Debt ($m) | 4,800 | 400 |

Share price ($) | 40 | 20 |

Number of shares (m) | 30 | 15 |

Ignore transaction costs and fees. Assume that the firms' debt and equity are fairly priced, and that each firms' debts' risk, yield and values remain constant. The acquisition is planned to occur immediately, so ignore the time value of money.

Calculate the merged firm's share price and total number of shares after the takeover has been completed.

**Question 525** income and capital returns, real and nominal returns and cash flows, inflation

Which of the following statements about cash in the form of notes and coins is **NOT** correct? Assume that inflation is positive.

Notes and coins:

A **2**-year futures contract on a stock paying a continuous dividend yield of **3**% pa was bought when the underlying stock price was $**10** and the risk free rate was **10**% per annum with **continuous compounding**. Assume that investors are risk-neutral, so the stock's total required return is the risk free rate.

Find the forward price ##(F_2)## and value of the contract ##(V_0)## initially. Also find the value of the contract in 6 months ##(V_{0.5})## if the stock price rose to $**12**.

An equity index is currently at **5,000** points. The **2** year futures price is **5,400** points and the total required return is **8**% pa with continuous compounding. Each index point is worth $**25**.

What is the implied continuous dividend yield as a continuously compounded rate per annum?

**Question 771** debt terminology, interest expense, interest tax shield, credit risk, no explanation

You deposit money into a bank account. Which of the following statements about this deposit is **NOT** correct?

**Question 790** mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate, log-normal distribution, VaR, confidence interval

A risk manager has identified that their hedge fund’s continuously compounded portfolio returns are normally distributed with a mean of **10**% pa and a standard deviation of **30**% pa. The hedge fund’s portfolio is currently valued at $**100** million. Assume that there is no estimation error in these figures and that the normal cumulative density function at 1.644853627 is 95%.

Which of the following statements is **NOT** correct? All answers are rounded to the nearest dollar.

**Question 860** idiom, hedging, speculation, arbitrage, market making, insider trading, no explanation

Which class of derivatives market trader is **NOT** principally focused on ‘buying low and selling high’?

**Question 974** foreign exchange rate, monetary policy, no explanation

Suppose the market expects the Bank of Japan (BoJ) to **increase** their short term interest rate by 15 basis points at their next meeting. The current short term interest rate is -0.1% pa and the exchange rate is 100 JPY per USD.

As expected, the BoJ announce that they will **increase** short term interest rate by 15 basis points.

What do you expect to happen to Japan’s exchange rate on the day when the announcement is made? The Japanese Yen (JPY) is likely to: