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 57  interest only loan

You just borrowed $400,000 in the form of a 25 year interest-only mortgage with monthly payments of $3,000 per month. The interest rate is 9% pa which is not expected to change.

You actually plan to pay more than the required interest payment. You plan to pay $3,300 in mortgage payments every month, which your mortgage lender allows. These extra payments will reduce the principal and the minimum interest payment required each month.

At the maturity of the mortgage, what will be the principal? That is, after the last (300th) interest payment of $3,300 in 25 years, how much will be owing on the mortgage?

(a) $6,766.6469

(b) $35,748.4866

(c) $63,663.4188

(d) $90,000.0000

(e) Nothing, the mortgage will be fully paid off prior to maturity.

Question 72  CAPM, portfolio beta, portfolio risk

Portfolio Details
Stock	Expected return	Standard deviation	Correlation	Beta	Dollars invested
A	0.2	0.4	0.12	0.5	40
B	0.3	0.8		1.5	80

What is the beta of the above portfolio?

(a) 0.75

(b) 0.833333333

(c) 1

(d) 1.166666667

(e) 1.4

Question 300  NPV, opportunity cost

What is the net present value (NPV) of undertaking a full-time Australian undergraduate business degree as an Australian citizen? Only include the cash flows over the duration of the degree, ignore any benefits or costs of the degree after it's completed.

Assume the following:

• The degree takes 3 years to complete and all students pass all subjects.
• There are 2 semesters per year and 4 subjects per semester.
• University fees per subject per semester are $1,277, paid at the start of each semester. Fees are expected to remain constant in real terms for the next 3 years.
• There are 52 weeks per year.
• The first semester is just about to start (t=0). The first semester lasts for 19 weeks (t=0 to 19).
• The second semester starts immediately afterwards (t=19) and lasts for another 19 weeks (t=19 to 38).
• The summer holidays begin after the second semester ends and last for 14 weeks (t=38 to 52). Then the first semester begins the next year, and so on.
• Working full time at the grocery store instead of studying full-time pays $20/hr and you can work 35 hours per week. Wages are paid at the end of each week and are expected to remain constant in real terms.
• Full-time students can work full-time during the summer holiday at the grocery store for the same rate of $20/hr for 35 hours per week.
• The discount rate is 9.8% pa. All rates and cash flows are real. Inflation is expected to be 3% pa. All rates are effective annual.

The NPV of costs from undertaking the university degree is:

(a) $98,385.98

(b) $97,915.91

(c) $75,130.29

(d) $54,018.93

(e) $27,523.89

Question 376  leverage, capital structure, no explanation

Interest expense on debt is tax-deductible, but dividend payments on equity are not. or ?

Question 528  DDM, income and capital returns

The perpetuity with growth formula, also known as the dividend discount model (DDM) or Gordon growth model, is appropriate for valuing a company's shares. ##P_0## is the current share price, ##C_1## is next year's expected dividend, ##r## is the total required return and ##g## is the expected growth rate of the dividend.

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

The below graph shows the expected future price path of the company's shares. Which of the following statements about the graph is NOT correct?

(a) Between points A and B, the share price is expected to grow by ##r##.

(b) Between points B and C, the share price is expected to instantaneously fall by ##C_1##.

(c) Between points A and C, the share price is expected to grow by ##g##.

(d) Between points B and D, the share price is expected to grow by ##g##.

(e) Between points D and E, the share price is expected to instantaneously fall by ##C_1.(1+r)^1##.

Question 711  continuously compounding rate, continuously compounding rate conversion

A continuously compounded semi-annual return of 5% ##(r_\text{cc 6mth})## is equivalent to a continuously compounded annual return ##(r_\text{cc annual})## of:

(a) 30% pa

(b) 26.236426% pa

(c) 10.254219% pa

(d) 10.25% pa

(e) 10% pa

Question 831  option, American option, no explanation

Which of the following statements about American-style options is NOT correct? American-style:

(a) Options are always worth more than or equal to equivalent European-style options.

(b) Call options on dividend-paying stocks should sometimes be exercised just before the dividend.

(c) Put options on dividend-paying stocks should sometimes be exercised just after the dividend.

(d) Call options should be exercised now if the intrinsic option value ##(S-K)## is greater than the expected present value of the option’s future payoffs.

(e) Put options should be exercised now if the intrinsic option value ##(K-S)## is less than the expected present value of the option’s future payoffs.

Question 856  credit terms, no explanation

Your supplier’s credit terms are "1/10 net 30". Which of the following statements about these credit terms is NOT correct?

If you intend to buy an item from your supplier for a tag price of $100 and you:

(a) Pay straightaway then you only have to pay $99.

(b) Pay on the 10th day then you’ll be asked to pay the full $100.

(c) Pay on the 11th day then you’ll be asked to pay the full $100.

(d) Pay on the 30th day then you’ll be asked to pay the full $100.

(e) Pay on the 40th day then you’ll be asked to pay the full $100 and the business owner may be upset with you and might not give you credit next time.

Question 893  balance of payments, current account

This question is about the Balance of Payments. Australia's current account as a percent of nominal gross domestic product (GDP) per annum is shown in the graph below.

Assume that all foreign and domestic assets are either debt which makes interest income or equity which makes dividend income, and vice versa for liabilities which cost interest and dividend payments, respectively.

Which of the following statements is NOT correct?

(a) TradeSurplus = Exports - Imports

(b) NetIncome = DividendsReceived + InterestReceived - DividendsPaid - InterestPaid

(c) CurrentAccountSurplus = NetIncome - TradeSurplus

(d) CurrentAccountSurplus = -1 × NetCapitalInflow = NetCapitalOutflow