**Question 50** DDM, stock pricing, inflation, real and nominal returns and cash flows

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 stock's correlation with the market portfolio increases while its total risk is unchanged. What will happen to the stock's expected return and systematic risk?

Bonds X and Y are issued by different companies, but they both pay a semi-annual coupon of **10**% pa and they have the same face value ($100) and maturity (3 years).

The only difference is that bond X and Y's **yields** are **8** and **12**% pa respectively. Which of the following statements is true?

You're trying to save enough money for a deposit to buy a house. You want to buy a house worth $400,000 and the bank requires a 20% deposit ($80,000) before it will give you a loan for the other $320,000 that you need.

You currently have no savings, but you just started working and can save $2,000 per month, with the first payment in one month from now. Bank interest rates on savings accounts are 4.8% pa with interest paid monthly and interest rates are not expected to change.

How long will it take to save the $80,000 deposit? Round your answer up to the nearest month.

**Question 338** market efficiency, CAPM, opportunity cost, technical analysis

A man inherits $**500,000** worth of shares.

He believes that by learning the secrets of trading, keeping up with the financial news and doing complex trend analysis with charts that he can quit his job and become a self-employed day trader in the equities markets.

What is the expected gain from doing this over the first year? Measure the net gain in wealth received at the end of this first year due to the decision to become a day trader. Assume the following:

- He earns $
**60,000**pa in his current job, paid in a lump sum at the end of each year. - He enjoys examining share price graphs and day trading just as much as he enjoys his current job.
- Stock markets are weak form and semi-strong form efficient.
- He has no inside information.
- He makes
**1**trade every day and there are**250**trading days in the year. Trading costs are $**20**per trade. His broker invoices him for the trading costs at the end of the year. - The shares that he currently owns and the shares that he intends to trade have the same level of systematic risk as the market portfolio.
- The market portfolio's expected return is
**10**% pa.

Measure the **net gain** over the **first** year as an expected wealth increase at the **end** of the year.

One formula for calculating a levered firm's free cash flow (FFCF, or CFFA) is to use earnings before interest and tax (EBIT).

###\begin{aligned} FFCF &= (EBIT)(1-t_c) + Depr - CapEx -\Delta NWC + IntExp.t_c \\ &= (Rev - COGS - Depr - FC)(1-t_c) + Depr - CapEx -\Delta NWC + IntExp.t_c \\ \end{aligned} \\###

A company can invest funds in a five year project at LIBOR plus **50** basis points pa. The five-year swap rate is **4**% pa. What fixed rate of interest can the company earn over the next five years by using the swap?

**Question 899** comparative advantage in trade, production possibilities curve, no explanation

Adam and Bella are the only people on a remote island. Their production possibility curves are shown in the graph.

Assume that Adam and Bella cooperate according to the principle of comparative advantage.

Which of the following statements is **NOT** correct?

**Question 903** option, Black-Scholes-Merton option pricing, option on stock index

A **six** month European-style **call** option on the S&P500 stock index has a strike price of **2800** points.

The underlying S&P500 stock index currently trades at **2700** points, has a continuously compounded dividend yield of **2**% pa and a standard deviation of continuously compounded returns of **25**% pa.

The risk-free interest rate is **5**% pa continuously compounded.

Use the Black-Scholes-Merton formula to calculate the option price. The call option price now is: