Fight Finance

Most listed Australian companies pay dividends twice per year, the 'interim' and 'final' dividends, which are roughly 6 months apart.

You are an equities analyst trying to value the company BHP. You decide to use the Dividend Discount Model (DDM) as a starting point, so you study BHP's dividend history and you find that BHP tends to pay the same interim and final dividend each year, and that both grow by the same rate.

You expect BHP will pay a $0.55 interim dividend in six months and a $0.55 final dividend in one year. You expect each to grow by 4% next year and forever, so the interim and final dividends next year will be $0.572 each, and so on in perpetuity.

Assume BHP's cost of equity is 8% pa. All rates are quoted as nominal effective rates. The dividends are nominal cash flows and the inflation rate is 2.5% pa.

What is the current price of a BHP share?

A zero coupon bond that matures in 6 months has a face value of $1,000.

The firm that issued this bond is trying to forecast its income statement for the year. It needs to calculate the interest expense of the bond this year.

The bond is highly illiquid and hasn't traded on the market. But the finance department have assessed the bond's fair value to be $950 and this is its book value right now at the start of the year.

Assume that:

• the firm uses the 'effective interest method' to calculate interest expense.
• the market value of the bond is the same as the book value.
• the firm is only interested in this bond's interest expense. Do not include the interest expense for a new bond issued to refinance the current one, as would normally happen.

What will be the interest expense of the bond this year for the purpose of forecasting the income statement?

If the current AUD exchange rate is USD 0.9686 = AUD 1, what is the European terms quote of the AUD against the USD?

A residential investment property has an expected nominal total return of 6% pa and nominal capital return of 3% pa.

Inflation is expected to be 2% pa. All rates are given as effective annual rates.

What are the property's expected real total, capital and income returns? The answer choices below are given in the same order.

A firm has current assets totaling $1.5b of which cash is $0.25b and inventories is $0.5b. Current liabilities total $2b of which accounts payable is $1b.

What is the firm's quick ratio, also known as the acid test ratio?

Which of the below formulas gives the payoff ##(f)## at maturity ##(T)## from being long a call option? Let the underlying asset price at maturity be ##S_T## and the exercise price be ##X_T##.

Which of the below formulas gives the payoff at maturity ##(f_T)## from being long a future? Let the underlying asset price at maturity be ##S_T## and the locked-in futures price be ##K_T##.

The standard deviation of monthly changes in the spot price of corn is 50 cents per bushel. The standard deviation of monthly changes in the futures price of corn is 40 cents per bushel. The correlation between the spot price of corn and the futures price of corn is 0.9.

It is now March. A corn chip manufacturer is committed to buying 250,000 bushels of corn in May. The spot price of corn is 381 cents per bushel and the June futures price is 399 cents per bushel.

The corn chip manufacturer wants to use the June corn futures contracts to hedge his risk. Each futures contract is for the delivery of 5,000 bushels of corn. One bushel is about 127 metric tons.

How many corn futures should the corn chip manufacturer buy to hedge his risk? Round your answer to the nearest whole number of contracts. Remember to tail the hedge.

A home loan company advertises an interest rate of 4.5% pa, payable monthly. Which of the following statements about the interest rate is NOT correct?

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: