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 company issues a large amount of bonds to raise money for new projects of similar risk to the company's existing projects. The net present value (NPV) of the new projects is positive but small. Assume a classical tax system. Which statement is **NOT** correct?

You want to buy an apartment worth $300,000. You have saved a deposit of $60,000.

The bank has agreed to lend you $240,000 as an **interest only** mortgage loan with a term of 30 years. The interest rate is 6% pa and is not expected to change. What will be your monthly payments?

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

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

If the assumptions of the DDM hold, which one of the following statements is **NOT** correct? The long term expected:

**Question 345** capital budgeting, break even, NPV

Project Data | ||

Project life | 10 yrs | |

Initial investment in factory | $10m | |

Depreciation of factory per year | $1m | |

Expected scrap value of factory at end of project | $0 | |

Sale price per unit | $10 | |

Variable cost per unit | $6 | |

Fixed costs per year, paid at the end of each year | $2m | |

Interest expense per year | 0 | |

Tax rate | 30% | |

Cost of capital per annum | 10% | |

**Notes**

- The firm's current liabilities are forecast to stay at $0.5m. The firm's current assets (mostly inventory) is currently $1m, but is forecast to grow by $0.1m at the end of each year due to the project.

At the end of the project, the current assets accumulated due to the project can be sold for the same price that they were bought. - A marketing survey was used to forecast sales. It cost $1.4m which was just paid. The cost has been capitalised by the accountants and is tax-deductible over the life of the project, regardless of whether the project goes ahead or not. This amortisation expense is not included in the depreciation expense listed in the table above.

**Assumptions**

- All cash flows occur at the start or end of the year as appropriate, not in the middle or throughout the year.
- All rates and cash flows are real. The inflation rate is 3% pa.
- All rates are given as effective annual rates.

Find the break even unit production (Q) per year to achieve a zero *Net Income* (NI) and *Net Present Value* (NPV), respectively. The answers below are listed in the same order.

The current gold price is $**700**, gold storage costs are **2**% pa and the risk free rate is **10**% pa, both with **continuous compounding**.

What should be the **3** year gold futures price?

A trader **buys** a one year futures contract on crude oil. The contract is for the delivery of 1,000 barrels. The current futures price is $38.94 per barrel. The initial margin is $3,410 per contract, and the maintenance margin is $3,100 per contract.

What is the smallest price change that would lead to a margin call for the buyer?

A company conducts a **10** for **3** stock split. What is the percentage increase in the stock price and the number of shares outstanding? The answers are given in the same order.

Short selling is a way to make money from falling prices. In what order must the following steps be completed to short-sell an asset? Let Tom, Dick and Harry be traders in the share market.

- Step P: Purchase the asset from Harry.
- Step G: Give the asset to Tom.
- Step W: Wait and hope that the asset price falls.
- Step B: Borrow the asset from Tom.
- Step S: Sell the asset to Dick.

Select the statement with the correct order of steps.

A **one** year European-style **put** option has a strike price of $**4**. The option's underlying stock pays no dividends and currently trades at $**5**. The risk-free interest rate is **10**% pa continuously compounded. Use a **single** step binomial tree to calculate the option price, assuming that the price could rise to $**8** ##(u = 1.6)## or fall to $**3.125** ##(d = 1/1.6)## in one year. The put option price now is: