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 will be the price of the stock in three and a half years (t = 3.5)?

A wholesale building supplies business offers credit to its customers. Customers are given 60 days to pay for their goods, but if they pay within 7 days they will get a 2% 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 7th day or the 60th day. All rates given below are effective annual rates.

**Question 249** equivalent annual cash flow, effective rate conversion

Details of two different types of desserts or edible treats are given below:

- High-sugar treats like candy, chocolate and ice cream make a person very happy. High sugar treats are cheap at only $2 per day.
- Low-sugar treats like nuts, cheese and fruit make a person equally happy if these foods are of high quality. Low sugar treats are more expensive at $4 per day.

The advantage of low-sugar treats is that a person only needs to pay the dentist $2,000 for fillings and root canal therapy once every 15 years. Whereas with high-sugar treats, that treatment needs to be done every 5 years.

The real discount rate is 10%, given as an effective annual rate. Assume that there are 365 days in every year and that all cash flows are real. The inflation rate is 3% given as an effective annual rate.

Find the equivalent annual cash flow (EAC) of the high-sugar treats and low-sugar treats, including dental costs. The below choices are listed in that order.

Ignore the pain of dental therapy, personal preferences and other factors.

A 30-day Bank Accepted Bill has a face value of $1,000,000. The interest rate is 2.5% pa and there are 365 days in the year. What is its price now?

Some financially minded people insist on a prenuptial agreement before committing to marry their partner. This agreement states how the couple's assets should be divided in case they divorce. Prenuptial agreements are designed to give the richer partner more of the couples' assets if they divorce, thus maximising the richer partner's:

The below screenshot of Microsoft's (MSFT) details were taken from the Google Finance website on 28 Nov 2014. Some information has been deliberately blanked out.

What was MSFT's approximate payout ratio over the last year?

Note that MSFT's past four quarterly dividends were $0.31, $0.28, $0.28 and $0.28.

Which of the following statements about yield curves is **NOT** correct?

**Question 768** accounting terminology, book and market values, no explanation

Accountants and finance professionals have lots of names for the same things which can be quite confusing.

Which of the following groups of items are **NOT** synonyms?

**Question 834** option, delta, theta, gamma, standard deviation, Black-Scholes-Merton option pricing

Which of the following statements about an option (either a call or put) and its underlying stock is **NOT** correct?

European Call Option |
||

on a non-dividend paying stock | ||

Description |
Symbol |
Quantity |

Spot price ($) | ##S_0## | 20 |

Strike price ($) | ##K_T## | 18 |

Risk free cont. comp. rate (pa) | ##r## | 0.05 |

Standard deviation of the stock's cont. comp. returns (pa) | ##\sigma## | 0.3 |

Option maturity (years) | ##T## | 1 |

Call option price ($) | ##c_0## | 3.939488 |

Delta | ##\Delta = N[d_1]## | 0.747891 |

##N[d_2]## | ##N[d_2]## | 0.643514 |

Gamma | ##\Gamma## | 0.053199 |

Theta ($/year) | ##\Theta = \partial c / \partial T## | 1.566433 |