Fight Finance

Question 4  DDM

For a price of $13, Carla will sell you a share paying a dividend of $1 in one year and every year after that forever. The required return of the stock is 10% pa.

Would you like to Carla's share or politely ?

Question 130  debt terminology

An 'interest rate' is the same thing as a 'yield'. or ?

Question 289  DDM, expected and historical returns, ROE

In the dividend discount model:

###P_0 = \dfrac{C_1}{r-g}###

The return ##r## is supposed to be the:

(a) Expected future total return of the market price of equity.

(b) Expected future total return of the book price of equity.

(c) Actual historical total return on the market price of equity.

(d) Actual historical total return on the book price of equity.

(e) Actual historical return on equity (ROE) defined as (Net Income / Owners Equity).

Question 371  interest tax shield, CFFA

One method for calculating a firm's free cash flow (FFCF, or CFFA) is to ignore interest expense. That is, pretend that interest expense ##(IntExp)## is zero:

###\begin{aligned} FFCF &= (Rev - COGS - Depr - FC - IntExp)(1-t_c) + Depr - CapEx -\Delta NWC + IntExp \\ &= (Rev - COGS - Depr - FC - 0)(1-t_c) + Depr - CapEx -\Delta NWC - 0\\ \end{aligned}###

Does this annual FFCF with zero interest expense or the annual interest tax shield?

Question 392  real option, option

An abandonment option is best modeled as a or option?

Question 502  NPV, IRR, mutually exclusive projects

An investor owns an empty block of land that has local government approval to be developed into a petrol station, car wash or car park. The council will only allow a single development so the projects are mutually exclusive.

All of the development projects have the same risk and the required return of each is 10% pa. Each project has an immediate cost and once construction is finished in one year the land and development will be sold. The table below shows the estimated costs payable now, expected sale prices in one year and the internal rates of returns (IRR's).

Mutually Exclusive Projects
Project	Cost now ($)	Sale price in one year ($)	IRR (% pa)
Petrol station	9,000,000	11,000,000	22.22
Car wash	800,000	1,100,000	37.50
Car park	70,000	110,000	57.14

Which project should the investor accept?

(a) Petrol station.

(b) Car wash.

(c) Car park.

(d) None of the projects.

(e) All of the projects.

Question 610  debt terminology

You deposit cash into your bank account. Does the deposit account represent a debt or to you?

Question 785  fixed for floating interest rate swap, non-intermediated swap

The below table summarises the borrowing costs confronting two companies A and B.

Bond Market Yields
	Fixed Yield to Maturity (%pa)	Floating Yield (%pa)
Firm A	3	L - 0.4
Firm B	5	L + 1

 

Firm A wishes to borrow at a floating rate and Firm B wishes to borrow at a fixed rate. Design a non-intermediated swap that benefits firm A only. What will be the swap rate?

(a) 2% pa.

(b) 2.6% pa.

(c) 3.4% pa.

(d) 4% pa.

(e) 4.6% pa.

Question 818  option, future, no explanation

Which derivatives position has the possibility of unlimited potential gains?

(a) Long call.

(b) Short call.

(c) Long put.

(d) Short put.

(e) Short future.

Question 823  option, option payoff at maturity, option profit, no explanation

A European call option should only be exercised if:

(a) It's 'out of the money'.

(b) It will give a positive profit: ##-c_0 + max(S_T-K_T,0) > 0##.

(c) It will give a positive payoff at maturity: ##max(S_T-K_T,0) > 0##.

(d) The underlying asset price is below the option strike price: ##S_T < K_T##.

(e) The underlying asset price is above the break-even price.