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 92  CAPM, SML, CML

Which statement(s) are correct?

(i) All stocks that plot on the Security Market Line (SML) are fairly priced.

(ii) All stocks that plot above the Security Market Line (SML) are overpriced.

(iii) All fairly priced stocks that plot on the Capital Market Line (CML) have zero idiosyncratic risk.

Select the most correct response:

(a) Only (i) is true.

(b) Only (ii) is true.

(c) Only (iii) is true.

(d) All statements (i), (ii) and (iii) are true.

(e) Only statements (i) and (iii) are true.

Question 229  bond pricing

An investor bought two fixed-coupon bonds issued by the same company, a zero-coupon bond and a 7% pa semi-annual coupon bond. Both bonds have a face value of $1,000, mature in 10 years, and had a yield at the time of purchase of 8% pa.

A few years later, yields fell to 6% pa. Which of the following statements is correct? Note that a capital gain is an increase in price.

(a) The zero-coupon bond and the 7% semi-annual coupon bond were both discount bonds but now they are both premium bonds.

(b) The zero-coupon bond and the 7% semi-annual coupon bond were both premium bonds but now they are both discount bonds.

(c) When yields fell, the investor made a capital loss on both bonds.

(d) When yields fell, the investor made a capital gain on both bonds.

(e) When yields fell, the investor made a capital gain on the zero coupon bond but a loss on the 7% semi-annual coupon bond.

Question 254  time calculation, APR

Your main expense is fuel for your car which costs $100 per month. You just refueled, so you won't need any more fuel for another month (first payment at t=1 month).

You have $2,500 in a bank account which pays interest at a rate of 6% pa, payable monthly. Interest rates are not expected to change.

Assuming that you have no income, in how many months time will you not have enough money to fully refuel your car?

(a) In 23 months (t=23 months).

(b) In 24 months (t=24 months).

(c) In 25 months (t=25 months).

(d) In 26 months (t=26 months).

(e) In 27 months (t=27 months).

Question 304  option

Which one of the following is NOT usually considered an 'investable' asset for long-term wealth creation?

(a) Shares (ordinary and preference stocks).

(b) Real estate (land and buildings).

(c) Options (calls and puts).

(d) Human capital (education)

(e) Debt (bond and loan assets)

Question 447  payout policy, corporate financial decision theory

Payout policy is most closely related to which part of a business?

(a) Assets.

(b) Liabilities and owner's equity.

(c) Current assets and current liabilities.

(d) Dividends and buy backs.

(e) Net income, also known as earnings or net profit after tax.

Question 468  PE ratio

A firm has 1 million shares which trade at a price of $30 each. The firm is expected to announce earnings of $3 million at the end of the year and pay an annual dividend of $1.50 per share.

What is the firm's (forward looking) price/earnings (PE) ratio?

(a) 20

(b) 10

(c) 3

(d) 2

(e) 0.5

Question 747  DDM, no explanation

A share will pay its next dividend of ##C_1## in one year, and will continue to pay a dividend every year after that forever, growing at a rate of ##g##. So the next dividend will be ##C_2=C_1 (1+g)^1##, then ##C_3=C_2 (1+g)^1##, and so on forever.

The current price of the share is ##P_0## and its required return is ##r##

Which of the following is NOT equal to the expected share price in 2 years ##(P_2)## just after the dividend at that time ##(C_2)## has been paid?

(a) ##P_0 (1+g)^2##

(b) ##P_0 (1+g)^2 - C_1 - C_2##

(c) ##(P_0 (1+r)^1 - C_1 ) (1+g)^1##

(d) ##(P_0 (1+r)^1 - C_1 ) (1+r)^1 - C_2##

(e) ##(P_0 (1+g)^1 ) (1+r)^1 - C_2##

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?

(a) ##N[d_1]##

(b) ##N[d_2]##

(c) ##−N[−d_1]##

(d) ##−N[−d_2]##

(e) ##N[−d_2]##

Question 848  monetary policy, no explanation

Which of the following is NOT the Australian central bank’s responsibility?

(a) The stability of the currency of Australia.

(b) The maintenance of full employment in Australia.

(c) The economic prosperity and welfare of the people of Australia.

(d) To meet an agreed medium-term inflation target.

(e) To balance the federal government budget over the business cycle.