# Fight Finance

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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, $d_3$?

 Portfolio Details Stock Expected return Standard deviation Correlation $(\rho_{A,B})$ Dollars invested A 0.1 0.4 0.5 60 B 0.2 0.6 140

What is the standard deviation (not variance) of the above portfolio?

A firm's WACC before tax would decrease due to:

A European company just issued two bonds, a

• 3 year zero coupon bond at a yield of 6% pa, and a
• 4 year zero coupon bond at a yield of 6.5% pa.

What is the company's forward rate over the fourth year (from t=3 to t=4)? Give your answer as an effective annual rate, which is how the above bond yields are quoted.

A timing option is best modeled as a or option?

A firm is considering a business project which costs $11m now and is expected to pay a constant$1m at the end of every year forever.

Assume that the initial $11m cost is funded using the firm's existing cash so no new equity or debt will be raised. The cost of capital is 10% pa. Which of the following statements about net present value (NPV), internal rate of return (IRR) and payback period is NOT correct? An investor bought a 20 year 5% pa fixed coupon government bond priced at par. The face value is$100. Coupons are paid semi-annually and the next one is in 6 months.

Six months later, just after the coupon at that time was paid, yields suddenly and unexpectedly rose to 5.5% pa. Note that all yields above are given as APR's compounding semi-annually.

What was the bond investors' historical total return over that first 6 month period, given as an effective semi-annual rate?

A trader sells one crude oil European style put option contract on the CME expiring in one year with an exercise price of $44 per barrel for a price of$6.64. The crude oil spot price is $40.33. If the trader doesn’t close out her contract before maturity, then at maturity she will have the: One year ago you bought a$1,000,000 house partly funded using a mortgage loan. The loan size was $800,000 and the other$200,000 was your wealth or 'equity' in the house asset.

The interest rate on the home loan was 4% pa.

Over the year, the house produced a net rental yield of 2% pa and a capital gain of 2.5% pa.

Assuming that all cash flows (interest payments and net rental payments) were paid and received at the end of the year, and all rates are given as effective annual rates, what was the total return on your wealth over the past year?

Hint: Remember that wealth in this context is your equity (E) in the house asset (V = D+E) which is funded by the loan (D) and your deposit or equity (E).

Question 881  Nixon Shock, Bretton Woods, foreign exchange rate, no explanation

In the ‘Nixon Shock’ on August 15, 1971, the United States government: