Fight Finance

Question 41  DDM, income and capital returns

The following is the Dividend Discount Model (DDM) used to price stocks:

### P_0 = \frac{d_1}{r-g} ###

Assume that the assumptions of the DDM hold and that the time period is measured in years.

Which of the following is equal to the expected dividend in 3 years, ## d_3 ##?

(a) ## d_1(1+g)^3 ##

(b) ## P_3(r-g) ##

(c) ## d_2(1+g)^2 ##

(d) ## P_0(1+g)^3(r-g) ##

(e) ## P_0(1+g)^2(r-g) ##

Question 101  payout policy, no explanation

An established mining firm announces that it expects large losses over the following year due to flooding which has temporarily stalled production at its mines. Which statement(s) are correct?

(i) If the firm adheres to a full dividend payout policy it will not pay any dividends over the following year.

(ii) If the firm wants to signal that the loss is temporary it will maintain the same level of dividends. It can do this so long as it has enough retained profits.

(iii) By law, the firm will be unable to pay a dividend over the following year because it cannot pay a dividend when it makes a loss.

Select the most correct response:

(a) Only (i) is true.

(b) Only (ii) is true.

(c) Only (iii) is true.

(d) Only (i) and (ii) is true.

(e) All statements (i), (ii) and (iii) are true.

Question 380  leverage, capital structure

The "interest expense" on a company's annual income statement is equal to the cash interest payments (but not principal payments) made to debt holders during the year. or ?

Question 384  option, real option

Which of the following is the least useful method or model to calculate the value of a real option in a project?

(a) Project value with the option less project value without the option.

(b) No-arbitrage binomial option pricing model.

(c) Risk-neutral binomial option pricing model.

(d) Gordon growth model.

(e) Black-Sholes option pricing model.

Question 694  utility

Which of the below statements about utility is NOT generally accepted by economists? Most people are thought to:

(a) Prefer more to less, meaning that they will always like to have more wealth.

(b) Be risk averse, meaning that they dislike risk as measured by the standard deviation of wealth.

(c) Have a positively sloped utility function, so the gradient or first derivative of the utility function is always positive.

(d) Have a utility function that increases at a diminishing rate. So the shape is concave down like a frown, or the second derivative is always negative.

(e) Have a utility function that rises until it reaches the satiation point, then it falls because too much wealth causes problems.

Question 745  real and nominal returns and cash flows, inflation, income and capital returns

If the nominal gold price is expected to increase at the same rate as inflation which is 3% pa, which of the following statements is NOT correct?

(a) The nominal income return of gold is 0% pa.

(b) The nominal capital return of gold is 3% pa.

(c) The nominal total return of gold is 3% pa.

(d) The real income return of gold is -3% pa.

(e) The real capital return of gold is 0% pa.

Question 760  time calculation, interest only loan, no explanation

Five years ago (##t=-5## years) you entered into an interest-only home loan with a principal of $500,000, an interest rate of 4.5% pa compounding monthly with a term of 25 years.

Then interest rates suddenly fall to 3% pa (##t=0##), but you continue to pay the same monthly home loan payments as you did before. Will your home loan be paid off by the end of its remaining term? If so, in how many years from now? Measure the time taken to pay off the home loan from the current time which is 5 years after the home loan was first entered into.

Assume that the lower interest rate was given to you immediately after the loan repayment at the end of year 5, which was the 60th payment since the loan was granted. Also assume that rates were and are expected to remain constant.

(a) Yes, in 117 months, which is 9 years and 9 months.

(b) Yes, in 152 months, which is 12 years and 8 months.

(c) Yes, in 202 months, which is 16 years and 10 months.

(d) Yes, in 240 months, which is 20 years.

(e) No, it will take longer than 20 years to pay off the loan.

Question 874  utility, return distribution, log-normal distribution, arithmetic and geometric averages

Who was the first theorist to endorse the maximisiation of the geometric average gross discrete return for investors (not gamblers) since it gave a "...portfolio that has a greater probability of being as valuable or more valuable than any other significantly different portfolio at the end of n years, n being large"?

(a) Daniel Bernoulli.

(b) John Larry Kelly Jr.

(c) Henry Allen Latane.

(d) Ole Peters.

(e) Paul Anthony Samuelson.

Question 945  stock split, bonus issue, stock dividend

A 3-for-2 stock split is equivalent to a 1-for-2 bonus issue or a 200% stock dividend. or ?

Question 955  option, out of the money option

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