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 140  IRR, NPV, profitability index

A project has an internal rate of return (IRR) which is greater than its required return. Select the most correct statement.

(a) The NPV will be negative and the profitability index will be less than 1.

(b) The NPV will be positive and the profitability index will be more than 1.

(c) The payback period will be positive and the Accounting Rate of Return will be more than the target return.

(d) The NPV will be positive and the profitability index will be negative.

(e) The NPV will be negative and the profitability index will be positive.

Question 194  bond pricing, capital raising

A firm wishes to raise $8 million now. They will issue 7% pa semi-annual coupon bonds that will mature in 10 years and have a face value of $100 each. Bond yields are 10% pa, given as an APR compounding every 6 months, and the yield curve is flat.

How many bonds should the firm issue?

(a) 107,441

(b) 98,393

(c) 90,480

(d) 80,000

(e) 64,039

Question 255  bond pricing

In these tough economic times, central banks around the world have cut interest rates so low that they are practically zero. In some countries, government bond yields are also very close to zero.

A three year government bond with a face value of $100 and a coupon rate of 2% pa paid semi-annually was just issued at a yield of 0%. What is the price of the bond?

(a) 94.20452353

(b) 100

(c) 106

(d) 112

(e) The bond is priceless.

Question 271  CAPM, option, risk, systematic risk, systematic and idiosyncratic risk

All things remaining equal, according to the capital asset pricing model, if the systematic variance of an asset increases, its required return will increase and its price will decrease.
If the idiosyncratic variance of an asset increases, its price will be unchanged.

What is the relationship between the price of a call or put option and the total, systematic and idiosyncratic variance of the underlying asset that the option is based on? Select the most correct answer.

Call and put option prices increase when the:

(a) Systematic variance of the underlying asset increases.

(b) Idiosyncratic variance of the underlying asset increases.

(c) Systematic, idiosyncratic or total variance of the underlying asset increases.

(d) Systematic variance of the underlying asset decreases.

(e) Systematic, idiosyncratic or total variance of the underlying asset decreases.

Question 359  CFFA

Which one of the following will have no effect on net income (NI) but decrease cash flow from assets (CFFA or FFCF) in this year for a tax-paying firm, all else remaining constant?

Remember:

###NI=(Rev-COGS-FC-Depr-IntExp).(1-t_c )### ###CFFA=NI+Depr-CapEx - ΔNWC+IntExp###

(a) An increase in revenue (Rev).

(b) An increase in rent expense (a type of recurring fixed cost, FC).

(c) An increase in depreciation expense (Depr).

(d) An increase in inventories (a current asset).

(e) An decrease in interest expense (IntExp).

Question 399  option, no explanation

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) ##\max(S_T - K, 0)##.

(b) ##\max(S_T - K, K)##.

(c) ##\max(K-S_T, 0)##.

(d) ##\max(K-S_T, K)##.

(e) ##\min(K-S_T, 0)##.

Question 451  DDM

The first payment of a constant perpetual annual cash flow is received at time 5. Let this cash flow be ##C_5## and the required return be ##r##.

So there will be equal annual cash flows at time 5, 6, 7 and so on forever, and all of the cash flows will be equal so ##C_5 = C_6 = C_7 = ...##

When the perpetuity formula is used to value this stream of cash flows, it will give a value (V) at time:

(a) 0, so ##V_0=\dfrac{C_5}{r}##

(b) 1, so ##V_1=\dfrac{C_5}{r}##

(c) 4, so ##V_4=\dfrac{C_5}{r}##

(d) 5, so ##V_5=\dfrac{C_5}{r}##

(e) 6, so ##V_6=\dfrac{C_5}{r}##

Question 510  bond pricing

Calculate the price of a newly issued ten year bond with a face value of $100, a yield of 8% pa and a fixed coupon rate of 6% pa, paid semi-annually. So there are two coupons per year, paid in arrears every six months.

(a) $114.8775

(b) $114.7202

(c) $86.5798

(d) $86.4097

(e) $40.2605

Question 617  systematic and idiosyncratic risk, risk, CAPM

A stock's required total return will increase when its:

(a) Systematic risk increases.

(b) Idiosyncratic risk increases.

(c) Total risk increases.

(d) Systematic risk decreases.

(e) Idiosyncratic risk decreases.