A stock is expected to pay the following dividends:
Cash Flows of a Stock | ||||||
Time (yrs) | 0 | 1 | 2 | 3 | 4 | ... |
Dividend ($) | 0.00 | 1.15 | 1.10 | 1.05 | 1.00 | ... |
After year 4, the annual dividend will grow in perpetuity at -5% pa. Note that this is a negative growth rate, so the dividend will actually shrink. So,
- the dividend at t=5 will be ##$1(1-0.05) = $0.95##,
- the dividend at t=6 will be ##$1(1-0.05)^2 = $0.9025##, and so on.
The required return on the stock is 10% pa. Both the growth rate and required return are given as effective annual rates.
What will be the price of the stock in four and a half years (t = 4.5)?
The theory of fixed interest bond pricing is an application of the theory of Net Present Value (NPV). Also, a 'fairly priced' asset is not over- or under-priced. Buying or selling a fairly priced asset has an NPV of zero.
Considering this, which of the following statements is NOT correct?
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?
You want to buy an apartment worth $300,000. You have saved a deposit of $60,000.
The bank has agreed to lend you $240,000 as an interest only mortgage loan with a term of 30 years. The interest rate is 6% pa and is not expected to change. What will be your monthly payments?
Question 419 capital budgeting, NPV, interest tax shield, WACC, CFFA, CAPM, no explanation
Project Data | ||
Project life | 1 year | |
Initial investment in equipment | $6m | |
Depreciation of equipment per year | $6m | |
Expected sale price of equipment at end of project | 0 | |
Unit sales per year | 9m | |
Sale price per unit | $8 | |
Variable cost per unit | $6 | |
Fixed costs per year, paid at the end of each year | $1m | |
Interest expense in first year (at t=1) | $0.53m | |
Tax rate | 30% | |
Government treasury bond yield | 5% | |
Bank loan debt yield | 6% | |
Market portfolio return | 10% | |
Covariance of levered equity returns with market | 0.08 | |
Variance of market portfolio returns | 0.16 | |
Firm's and project's debt-to-assets ratio | 50% | |
Notes
- Due to the project, current assets will increase by $5m now (t=0) and fall by $5m at the end (t=1). Current liabilities will not be affected.
Assumptions
- The debt-to-assets ratio will be kept constant throughout the life of the project. The amount of interest expense at the end of each period has been correctly calculated to maintain this constant debt-to-equity ratio.
- Millions are represented by 'm'.
- All cash flows occur at the start or end of the year as appropriate, not in the middle or throughout the year.
- All rates and cash flows are real. The inflation rate is 2% pa.
- All rates are given as effective annual rates.
- The 50% capital gains tax discount is not available since the project is undertaken by a firm, not an individual.
What is the net present value (NPV) of the project?
Question 723 mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate
Here is a table of stock prices and returns. Which of the statements below the table is NOT correct?
Price and Return Population Statistics | ||||
Time | Prices | LGDR | GDR | NDR |
0 | 100 | |||
1 | 99 | -0.010050 | 0.990000 | -0.010000 |
2 | 180.40 | 0.600057 | 1.822222 | 0.822222 |
3 | 112.73 | 0.470181 | 0.624889 | 0.375111 |
Arithmetic average | 0.0399 | 1.1457 | 0.1457 | |
Arithmetic standard deviation | 0.4384 | 0.5011 | 0.5011 | |
Question 730 DDM, income and capital returns, no explanation
A stock’s current price is $1. Its expected total return is 10% pa and its long term expected capital return is 4% pa. It pays an annual dividend and the next one will be paid in one year. All rates are given as effective annual rates. The dividend discount model is thought to be a suitable model for the stock. Ignore taxes. Which of the following statements about the stock is NOT correct?
Being long a call and short a put which have the same exercise prices and underlying stock is equivalent to being:
Below is the Australian federal government’s budget balance as a percent of GDP. Note that the columns to the right of the vertical black line were a forecast at the time. The x-axis shows financial years, so for example the 06/07 financial year represents the time period from 1 July 2006 to 30 June 2007.
Comparing the 2008/09 financial year to the previous one, the Australian federal government implemented: