Fight Finance

Question 39  DDM, perpetuity with growth

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?

(a) $25.6033

(b) $20.7476

(c) $20.0000

(d) $19.8835

(e) $18.3126

Question 279  diversification

Do you think that the following statement is or ? “Buying a single company stock usually provides a safer return than a stock mutual fund.”

Question 317  foreign exchange rate, American and European terms

If the USD appreciates against the AUD, the European terms quote of the AUD will or ?

Question 334  option

Which option position has the possibility of unlimited potential losses?

(a) Long call options.

(b) Short call options.

(c) Long put options.

(d) Short put options.

(e) No option positions have the possibility of unlimited potential losses.

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 664  real and nominal returns and cash flows, inflation, no explanation

What is the present value of real payments of $100 every year forever, with the first payment in one year? The nominal discount rate is 7% pa and the inflation rate is 4% pa.

(a) $3,466.6667

(b) $3,333.3333

(c) $3,205.1282

(d) $1,485.7143

(e) $1,428.5714

Question 687  option, no explanation

Which of the following statements about call options is NOT correct?

(a) Buyers of call options are required to pay an initial margin at the start.

(b) Call options are a zero-sum game in the sense that the winner gains at the expense of the loser.

(c) Buyers of call options have to pay the option price at the start.

(d) Buyers of call options do not care about the credit risk of the original call option seller since the contract is novated by the exchange.

(e) Speculators who sell call options hope that the underlying asset price falls.

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.

(a) Future portfolio values have a log-normal distribution. The mean (expected or arithmetic average) portfolio value in one year is $115,603,957.

(b) The median (50th percentile) portfolio value in one year is $115,603,957.

(c) The 90% confidence interval of continuously compounded portfolio returns over the next year ##(r_{0 \rightarrow 1})## is ##-39.3456088\% < r_{0 \rightarrow 1} < 59.3456088\%##.

(d) The 90% confidence interval of portfolio values in one year ##(V_1)## is ##\$67,472,095 < V_1 < \$181,023,395##.

(e) The annual 95% relative VaR is $48,131,863 and the absolute VaR is $32,527,905.

Question 952  option, in the money option

If a put option is in-the-money, then the spot price (##S_0##) is than, than or to the put option's strike price (##K_T##)?

Question 969  foreign exchange rate, no explanation

RBA analyst Adam Hamilton wrote in the December 2018 Bulletin article ‘Understanding Exchange Rates and Why They Are Important’ the following passage about bilateral exchange rates:

A bilateral exchange rate refers to the value of one currency relative to another. It is the most commonly referenced type of exchange rate. Most bilateral exchange rates are quoted against the US dollar (USD), as it is the most traded currency globally. Looking at the Australian dollar (AUD), the AUD/USD exchange rate gives you the amount of US dollars that you will receive for each Australian dollar that you convert (or sell). For example, an AUD/USD exchange rate of 0.75 means that you will get US75 cents for every 1 AUD.

An appreciation of the Australian dollar is an increase in its value compared with a foreign currency. This means that each Australian dollar buys you more foreign currency than before. Equivalently, if you are buying an item that is priced in foreign currency it will now cost you less in Australian dollars than before. If there is a depreciation of the Australian dollar, the opposite is true.

Based on this information, which of the following statements is NOT correct?

(a) 'US75 cents for every 1 AUD’ is an American terms quote of the AUD.

(b) 'US75 cents for every 1 AUD’ is equivalent to 0.75AUD per USD.

(c) The AUD would have appreciated against the USD if the quote moved from US75 to US80 cents for every 1 AUD.

(d) Importers of US goods into Australia would pay less in AUD and be happy if the exchange rate moved from US75 to US80 cents for every 1 AUD, all other things remaining equal.

(e) Exporters of Australian goods into the USA would receive less in AUD and be unhappy if the exchange rate moved from US75 to US80 cents for every 1 AUD, all other things remaining equal.