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 85  WACC, CAPM

A company has:

• 140 million shares outstanding.
• The market price of one share is currently $2.
• The company's debentures are publicly traded and their market price is equal to 93% of the face value.
• The debentures have a total face value of $50,000,000 and the current yield to maturity of corporate debentures is 12% per annum.
• The risk-free rate is 8.50% and the market return is 13.7%.
• Market analysts estimated that the company's stock has a beta of 0.90.
• The corporate tax rate is 30%.

What is the company's after-tax weighted average cost of capital (WACC) in a classical tax system?

(a) 13.18%

(b) 11.10%

(c) 12.50%

(d) 14.24%

(e) 15.00%

Question 257  bond pricing

A 10 year bond has a face value of $100, a yield of 6% pa and a fixed coupon rate of 8% pa, paid semi-annually. What is its price?

(a) $114.7202

(b) $114.8775

(c) $122.9398

(d) $126.628

(e) $174.3874

Question 406  leverage, WACC, margin loan, portfolio return

One year ago you bought $100,000 of shares partly funded using a margin loan. The margin loan size was $70,000 and the other $30,000 was your own wealth or 'equity' in the share assets.

The interest rate on the margin loan was 7.84% pa.

Over the year, the shares produced a dividend yield of 4% pa and a capital gain of 5% pa.

What was the total return on your wealth? Ignore taxes, assume that all cash flows (interest payments and dividends) were paid and received at the end of the year, and all rates above are effective annual rates.

(a) 1.0757%

(b) 2.7067%

(c) 5.1333%

(d) 9.0000%

(e) 11.7067%

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 536  idiom, bond pricing, capital structure, leverage

The expression 'my word is my bond' is often used in everyday language to make a serious promise.

Why do you think this expression uses the metaphor of a bond rather than a share?

(a) Because bonds are higher risk investments than shares.

(b) Because issuers must pay bond holders or face bankruptcy, while payments to shareholders are discretionary.

(c) Because bond holders are paid last in the event of bankruptcy, while shareholders are paid first.

(d) Because bonds always pay higher returns than shares.

(e) Because bonds are generally more liquid than shares.

Question 586  option

Which one of the following statements about option contracts is NOT correct?

(a) Option premium is another name for option price.

(b) An option contract's price is always changing.

(c) Strike price is another name for exercise price.

(d) An option contract's strike price is always changing.

(e) Call and put option premiums are paid at the start when the option is bought. Call option exercise prices are paid when they are exercised, usually at maturity.

Question 607  debt terminology

You deposit cash into your bank account. Have you or your money?

Question 621  market efficiency, technical analysis

Technical traders:

(a) Believe that asset prices follow a random walk.

(b) Believe that markets are weak form efficient

(c) Are pessimists, they believe that they cannot beat the market

(d) Base their investment decisions on past publicly available news

(e) Believe that the theory of weak form market efficiency is broken.

Question 838  option, put call parity

A stock, a call, a put and a bond are available to trade. The call and put options' underlying asset is the stock they and have the same strike prices, ##K_T##.

Being long the call and short the stock is equivalent to being:

(a) Long the put only.

(b) Long the put and long the bond.

(c) Long the put and short the bond.

(d) Short the put and long the bond.

(e) Short the put and short the bond.

Question 900  Basel accord

Which of the following statements about the Basel 3 minimum capital requirements is NOT correct? Common equity tier 1 (CET1) comprises the highest quality components of capital that fully satisfy all of the following characteristics:

(a) Provide a permanent and unrestricted commitment of funds;

(b) Are freely available to absorb losses;

(c) Impose unavoidable servicing charges against earnings;

(d) Rank behind the claims of depositors and other creditors in the event of winding-up of the issuer.