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

A share was bought for $20 (at t=0) and paid its annual dividend of $3 one year later (at t=1). Just after the dividend was paid, the share price was $16 (at t=1). What was the total return, capital return and income return? Calculate your answers as effective annual rates.

The choices are given in the same order: ## r_\text{total},r_\text{capital},r_\text{income} ##.

**Question 49** inflation, real and nominal returns and cash flows, APR, effective rate

In Australia, nominal yields on **semi**-annual coupon paying Government Bonds with 2 years until maturity are currently **2.83**% pa.

The inflation rate is currently **2.2**% pa, given as an APR compounding per **quarter**. The inflation rate is not expected to change over the next 2 years.

What is the real yield on these bonds, given as an APR compounding every 6 months?

Which statement(s) are correct?

(i) All stocks that plot on the Security Market Line (SML) are fairly priced.

(ii) All stocks that plot above the Security Market Line (SML) are overpriced.

(iii) All fairly priced stocks that plot on the Capital Market Line (CML) have zero idiosyncratic risk.

Select the most correct response:

**Question 397** financial distress, leverage, capital structure, NPV

A levered firm has a market value of assets of $**10**m. Its debt is all comprised of zero-coupon bonds which mature in one year and have a combined face value of $**9.9**m.

Investors are risk-neutral and therefore all debt and equity holders demand the same required return of **10**% pa.

Therefore the current market capitalisation of debt ##(D_0)## is $**9**m and equity ##(E_0)## is $**1**m.

A new project presents itself which requires an investment of $**2**m and will provide a:

- $
**6.6**m cash flow with probability 0.5 in the good state of the world, and a **-**$**4.4**m (notice the negative sign) cash flow with probability 0.5 in the bad state of the world.

The project can be funded using the company's excess cash, no debt or equity raisings are required.

What would be the new market capitalisation of equity ##(E_\text{0, with project})## if shareholders vote to proceed with the project, and therefore should shareholders proceed with the project?

A European call option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars.

What is an expression for the payoff at maturity ##(f_T)## in dollars from owning (being long) the call option?

A young lady is trying to decide if she should attend university. Her friends say that she should go to university because she is more likely to meet a clever young man than if she begins full time work straight away.

What's the correct way to classify this item from a capital budgeting perspective when trying to find the Net Present Value of going to university rather than working?

The opportunity to meet a desirable future spouse should be classified as:

An investor bought a **20** year **5**% pa fixed coupon government bond priced at **par**. The face value is $100. Coupons are paid semi-annually and the next one is in 6 months.

Six months later, just after the coupon at that time was paid, yields suddenly and unexpectedly rose to **5.5**% pa. Note that all yields above are given as APR's compounding semi-annually.

What was the bond investors' historical total return over that first 6 month period, given as an effective semi-annual rate?