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 99 capital structure, interest tax shield, Miller and Modigliani, trade off theory of capital structure
A firm changes its capital structure by issuing a large amount of debt and using the funds to repurchase shares. Its assets are unchanged.
Assume that:
- The firm and individual investors can borrow at the same rate and have the same tax rates.
- The firm's debt and shares are fairly priced and the shares are repurchased at the market price, not at a premium.
- There are no market frictions relating to debt such as asymmetric information or transaction costs.
- Shareholders wealth is measured in terms of utiliity. Shareholders are wealth-maximising and risk-averse. They have a preferred level of overall leverage. Before the firm's capital restructure all shareholders were optimally levered.
According to Miller and Modigliani's theory, which statement is correct?
Question 245 foreign exchange rate, monetary policy, foreign exchange rate direct quote, no explanation
Investors expect Australia's central bank, the RBA, to leave the policy rate unchanged at their next meeting.
Then unexpectedly, the policy rate is reduced due to fears that Australia's GDP growth is slowing.
What do you expect to happen to Australia's exchange rate? Direct and indirect quotes are given from the perspective of an Australian.
The Australian dollar will:
Estimate the Chinese bank ICBC's share price using a backward-looking price earnings (PE) multiples approach with the following assumptions and figures only. Note that the renminbi (RMB) is the Chinese currency, also known as the yuan (CNY).
- The 4 major Chinese banks ICBC, China Construction Bank (CCB), Bank of China (BOC) and Agricultural Bank of China (ABC) are comparable companies;
- ICBC 's historical earnings per share (EPS) is RMB 0.74;
- CCB's backward-looking PE ratio is 4.59;
- BOC 's backward-looking PE ratio is 4.78;
- ABC's backward-looking PE ratio is also 4.78;
Note: Figures sourced from Google Finance on 25 March 2014. Share prices are from the Shanghai stock exchange.
Find the cash flow from assets (CFFA) of the following project.
| One Year Mining Project Data | ||
| Project life | 1 year | |
| Initial investment in building mine and equipment | $9m | |
| Depreciation of mine and equipment over the year | $8m | |
| Kilograms of gold mined at end of year | 1,000 | |
| Sale price per kilogram | $0.05m | |
| Variable cost per kilogram | $0.03m | |
| Before-tax cost of closing mine at end of year | $4m | |
| Tax rate | 30% | |
Note 1: Due to the project, the firm also anticipates finding some rare diamonds which will give before-tax revenues of $1m at the end of the year.
Note 2: The land that will be mined actually has thermal springs and a family of koalas that could be sold to an eco-tourist resort for an after-tax amount of $3m right now. However, if the mine goes ahead then this natural beauty will be destroyed.
Note 3: The mining equipment will have a book value of $1m at the end of the year for tax purposes. However, the equipment is expected to fetch $2.5m when it is sold.
Find the project's CFFA at time zero and one. Answers are given in millions of dollars ($m), with the first cash flow at time zero, and the second at time one.
What is the covariance of a variable X with itself?
The cov(X, X) or ##\sigma_{X,X}## equals:
Alice, Bob, Chris and Delta are traders in the futures market. The following trades occur over a single day in a newly-opened equity index future that matures in one year which the exchange just made available.
1. Alice buys a future from Bob.
2. Chris buys a future from Delta.
3. Bob buys a future from Chris.
These were the only trades made in this equity index future. What was the trading volume and what is the open interest?
Which of the below statements about utility is NOT generally accepted by economists? Most people are thought to:
Telsa Motors advertises that its Model S electric car saves $570 per month in fuel costs. Assume that Tesla cars last for 10 years, fuel and electricity costs remain the same, and savings are made at the end of each month with the first saving of $570 in one month from now.
The effective annual interest rate is 15.8%, and the effective monthly interest rate is 1.23%. What is the present value of the savings?