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 ##?
Diversification is achieved by investing in a large amount of stocks. What type of risk is reduced by diversification?
The following cash flows are expected:
- 10 yearly payments of $60, with the first payment in 3 years from now (first payment at t=3 and last at t=12).
- 1 payment of $400 in 5 years and 6 months (t=5.5) from now.
What is the NPV of the cash flows if the discount rate is 10% given as an effective annual rate?
Which of the following statements about the weighted average cost of capital (WACC) is NOT correct?
Your friend is trying to find the net present value of an investment which:
- Costs $1 million initially (t=0); and
- Pays a single positive cash flow of $1.1 million in one year (t=1).
The investment has a total required return of 10% pa due to its moderate level of undiversifiable risk.
Your friend is aware of the importance of opportunity costs and the time value of money, but he is unsure of how to find the NPV of the project.
He knows that the opportunity cost of investing the $1m in the project is the expected gain from investing the money in shares instead. Like the project, shares also have an expected return of 10% since they have moderate undiversifiable risk. This opportunity cost is $0.1m ##(=1m \times 10\%)## which occurs in one year (t=1).
He knows that the time value of money should be accounted for, and this can be done by finding the present value of the cash flows in one year.
Your friend has listed a few different ways to find the NPV which are written down below.
Method 1: ##-1m + \dfrac{1.1m}{(1+0.1)^1} ##
Method 2: ##-1m + 1.1m - 1m \times 0.1 ##
Method 3: ##-1m + \dfrac{1.1m}{(1+0.1)^1} - 1m \times 0.1 ##
Which of the above calculations give the correct NPV? Select the most correct answer.
Question 624 franking credit, personal tax on dividends, imputation tax system, no explanation
Which of the following statements about Australian franking credits is NOT correct? Franking credits:
Question 797 option, Black-Scholes-Merton option pricing, option delta, no explanation
Which of the following quantities from the Black-Scholes-Merton option pricing formula gives the risk-neutral probability that a European put option will be exercised?