Fight Finance

Question 5  DDM

For a price of $6, Carlos will sell you a share which will pay a dividend of $1 in one year and every year after that forever. The required return of the stock is 10% pa.

Would you like to his share or politely ?

Question 83  portfolio risk, standard deviation

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 returns of the above portfolio?

(a) 0.4368

(b) 0.4911

(c) 0.6331

(d) 0.6564

(e) 0.7348

Question 182  NPV, IRR, pay back period

A project's NPV is positive. Select the most correct statement:

(a) The project should be rejected.

(b) The project's IRR is more than its required return.

(c) The project's IRR is less than its required return.

(d) The project's IRR is equal to its required return.

(e) The project will never pay itself off, assuming that the discount rate is positive.

Question 192  NPV, APR

Harvey Norman the large retailer often runs sales advertising 2 years interest free when you purchase its products. This offer can be seen as a free personal loan from Harvey Norman to its customers.

Assume that banks charge an interest rate on personal loans of 12% pa given as an APR compounding per month. This is the interest rate that Harvey Norman deserves on the 2 year loan it extends to its customers. Therefore Harvey Norman must implicitly include the cost of this loan in the advertised sale price of its goods.

If you were a customer buying from Harvey Norman, and you were paying immediately, not in 2 years, what is the minimum percentage discount to the advertised sale price that you would insist on? (Hint: if it makes it easier, assume that you’re buying a product with an advertised price of $100).

(a) 79.72%

(b) 24.00%

(c) 21.24%

(d) 20.28%

(e) 12.00%

Question 237  WACC, Miller and Modigliani, interest tax shield

Which of the following discount rates should be the highest for a levered company? Ignore the costs of financial distress.

(a) Cost of debt (##r_\text{D}##).

(b) Unlevered cost of equity (##r_\text{E, U}##).

(c) Levered cost of equity (##r_\text{E, L}##).

(d) Levered before-tax WACC (##r_\text{V, LxITS}##).

(e) Levered after-tax WACC (##r_\text{V, LwITS}##).

Question 659  APR, effective rate, effective rate conversion, no explanation

A home loan company advertises an interest rate of 9% pa, payable monthly. Which of the following statements about the interest rate is NOT correct? All rates are given with an accuracy of 4 decimal places.

(a) The APR compounding monthly is 9.000% pa.

(b) The effective monthly rate is 0.7500% pa.

(c) The effective annual rate is 9.3807% pa.

(d) The effective 6 month rate is 4.5000% pa.

(e) The APR compounding semi-annually is 9.1704% pa.

Question 768  accounting terminology, book and market values, no explanation

Accountants and finance professionals have lots of names for the same things which can be quite confusing.

Which of the following groups of items are NOT synonyms?

(a) Revenue, sales, turn over.

(b) Paid up capital, contributed equity.

(c) Shares, stock, equity.

(d) Net income, earnings, net profit after tax, the bottom line.

(e) Market capitalisation of equity, book value of equity.

Question 801  negative gearing, leverage, capital structure, no explanation

The following steps set out the process of ‘negative gearing’ an investment property in Australia. Which of these steps or statements is NOT correct? To successfully achieve negative gearing on an investment property:

(a) Buy an investment property with low expected future capital gains and high rental income, funded using a low proportion of debt (mortgage loan);

(b) Rent the investment property to a tenant;

(c) Negative gearing is achieved when the property investment’s annual taxable profit is negative, due to the loan’s interest expense being greater than the net rent (rental revenue less the renting expenses such as maintenance);

(d) Deduct the property’s income loss from the investor’s separate personal wage from labour. This means that the investor will pay less personal income tax than if they didn’t make the levered property investment;

(e) The investment property will be a positive-NPV investment if the capital gains are greater than the income losses on an after-tax, risk-adjusted, present-value basis.

Question 805  short selling

Short selling is a way to make money from falling prices. In what order must the following steps be completed to short-sell an asset? Let Tom, Dick and Harry be traders in the share market.

• Step P: Purchase the asset from Harry.
• Step G: Give the asset to Tom.
• Step W: Wait and hope that the asset price falls.
• Step B: Borrow the asset from Tom.
• Step S: Sell the asset to Dick.

Select the statement with the correct order of steps.

(a) P, G, W, B, S.

(b) B, G, W, P, S.

(c) B, W, G, P, S.

(d) P, W, S, B, G.

(e) B, S, W, P, G.

Question 906  effective rate, return types, net discrete return, return distribution, price gains and returns over time

For an asset's price to double from say $1 to $2 in one year, what must its effective annual return be? Note that an effective annual return is also called a net discrete return per annum. If the price now is ##P_0## and the price in one year is ##P_1## then the effective annul return over the next year is:

###r_\text{effective annual} = \dfrac{P_1 - P_0}{P_0} = \text{NDR}_\text{annual}###

(a) 0%

(b) 30.102999566%

(c) 69.314718056%

(d) 100%

(e) 200%