The required return of a project is 10%, given as an effective annual rate. Assume that the cash flows shown in the table are paid all at once at the given point in time.
What is the Profitability Index (PI) of the project?
| Project Cash Flows | |
| Time (yrs) | Cash flow ($) |
| 0 | -100 |
| 1 | 0 |
| 2 | 121 |
Question 215 equivalent annual cash flow, effective rate conversion
You're about to buy a car. These are the cash flows of the two different cars that you can buy:
- You can buy an old car for $5,000 now, for which you will have to buy $90 of fuel at the end of each week from the date of purchase. The old car will last for 3 years, at which point you will sell the old car for $500.
- Or you can buy a new car for $14,000 now for which you will have to buy $50 of fuel at the end of each week from the date of purchase. The new car will last for 4 years, at which point you will sell the new car for $1,000.
Bank interest rates are 10% pa, given as an effective annual rate. Assume that there are exactly 52 weeks in a year. Ignore taxes and environmental and pollution factors.
Should you buy the or the ?
You just agreed to a 30 year fully amortising mortgage loan with monthly payments of $2,500. The interest rate is 9% pa which is not expected to change.
How much did you borrow? After 10 years, how much will be owing on the mortgage? The interest rate is still 9% and is not expected to change. The below choices are given in the same order.
Find Sidebar Corporation's Cash Flow From Assets (CFFA), also known as Free Cash Flow to the Firm (FCFF), over the year ending 30th June 2013.
| Sidebar Corp | ||
| Income Statement for | ||
| year ending 30th June 2013 | ||
| $m | ||
| Sales | 405 | |
| COGS | 100 | |
| Depreciation | 34 | |
| Rent expense | 22 | |
| Interest expense | 39 | |
| Taxable Income | 210 | |
| Taxes at 30% | 63 | |
| Net income | 147 | |
| Sidebar Corp | ||
| Balance Sheet | ||
| as at 30th June | 2013 | 2012 |
| $m | $m | |
| Cash | 0 | 0 |
| Inventory | 70 | 50 |
| Trade debtors | 11 | 16 |
| Rent paid in advance | 4 | 3 |
| PPE | 700 | 680 |
| Total assets | 785 | 749 |
| Trade creditors | 11 | 19 |
| Bond liabilities | 400 | 390 |
| Contributed equity | 220 | 220 |
| Retained profits | 154 | 120 |
| Total L and OE | 785 | 749 |
Note: All figures are given in millions of dollars ($m).
The cash flow from assets was:
The first payment of a constant perpetual annual cash flow is received at time 5. Let this cash flow be ##C_5## and the required return be ##r##.
So there will be equal annual cash flows at time 5, 6, 7 and so on forever, and all of the cash flows will be equal so ##C_5 = C_6 = C_7 = ...##
When the perpetuity formula is used to value this stream of cash flows, it will give a value (V) at time:
A $100 stock has a continuously compounded expected total return of 10% pa. Its dividend yield is 2% pa with continuous compounding. What do you expect its price to be in 2.5 years?
Which of the below formulas gives the profit ##(\pi)## from being short a call option? Let the underlying asset price at maturity be ##S_T##, the exercise price be ##X_T## and the option price be ##f_{LC,0}##. Note that ##S_T##, ##X_T## and ##f_{LC,0}## are all positive numbers.
Question 825 future, hedging, tailing the hedge, speculation, no explanation
An equity index fund manager controls a USD500 million diversified equity portfolio with a beta of 0.9. The equity manager expects a significant rally in equity prices next year. The market does not think that this will happen. If the fund manager wishes to increase his portfolio beta to 1.5, how many S&P500 futures should he buy?
The US market equity index is the S&P500. One year CME futures on the S&P500 currently trade at 2,155 points and the spot price is 2,180 points. Each point is worth $250.
The number of one year S&P500 futures contracts that the fund manager should buy is:
Question 834 option, delta, theta, gamma, standard deviation, Black-Scholes-Merton option pricing
Which of the following statements about an option (either a call or put) and its underlying stock is NOT correct?
| European Call Option | ||
| on a non-dividend paying stock | ||
| Description | Symbol | Quantity |
| Spot price ($) | ##S_0## | 20 |
| Strike price ($) | ##K_T## | 18 |
| Risk free cont. comp. rate (pa) | ##r## | 0.05 |
| Standard deviation of the stock's cont. comp. returns (pa) | ##\sigma## | 0.3 |
| Option maturity (years) | ##T## | 1 |
| Call option price ($) | ##c_0## | 3.939488 |
| Delta | ##\Delta = N[d_1]## | 0.747891 |
| ##N[d_2]## | ##N[d_2]## | 0.643514 |
| Gamma | ##\Gamma## | 0.053199 |
| Theta ($/year) | ##\Theta = \partial c / \partial T## | 1.566433 |
The market's expected total return is 10% pa and the risk free rate is 5% pa, both given as effective annual rates.
A stock has a beta of 0.7.
What do you think will be the stock's expected return over the next year, given as an effective annual rate?