Fight Finance

Question 55  NPV, DDM

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)?

(a) $5.2615

(b) $6.0386

(c) $6.3333

(d) $6.6425

(e) $11.9040

Question 74  WACC, capital structure, CAPM

A firm's weighted average cost of capital before tax (##r_\text{WACC before tax}##) would increase due to:

(a) The firm issuing more debt and using the proceeds to repurchase stock.

(b) The firm issuing more equity and using the proceeds to pay off debt holders.

(c) The firm's industry becoming more systematically risky, for example if it was a mining company whose performance became more sensitive to countries' GDP growth, so the correlation of the firm's returns with the market was higher.

(d) The firm's industry becoming less systematically risky, for example if it was a child care centre and the government announced higher subsidies for parents using child care centres, so the correlation of the firm's returns with the market was lower.

(e) None of the above.

Question 122  option

You have just sold an 'in the money' 6 month European put option on the mining company BHP at an exercise price of $40 for a premium of $3.

Which of the following statements best describes your situation?

(a) You have bought the right to buy a BHP share for $40 in 6 months.

(b) You have bought the right to sell a BHP share for $40 in 6 months.

(c) You have bought the obligation to sell a BHP share for $40 in 6 months.

(d) You have sold the right that allows your counterparty to buy a BHP share from you for $40 in 6 months. This means that you have the obligation to sell a BHP share to your counterparty for $40 in 6 months if he wants to buy it.

(e) You have sold the right that allows your counterparty to sell a BHP share to you for $40 in 6 months. This means that you have the obligation to buy a BHP share from your counterparty for $40 in 6 months if he wants to sell it.

Question 152  NPV, Annuity

The following cash flows are expected:

• 10 yearly payments of $80, with the first payment in 3 years from now (first payment at t=3).
• 1 payment of $600 in 5 years and 6 months (t=5.5) from now.

What is the NPV of the cash flows if the discount rate is 10% given as an effective annual rate?

(a) $1,006.25

(b) $846.78

(c) $761.47

(d) $741.87

(e) $724.54

Question 204  time calculation, fully amortising loan, APR

You just signed up for a 30 year fully amortising mortgage loan with monthly payments of $1,500 per month. The interest rate is 9% pa which is not expected to change.

To your surprise, you can actually afford to pay $2,000 per month and your mortgage allows early repayments without fees. If you maintain these higher monthly payments, how long will it take to pay off your mortgage?

(a) 38.87 months, which is 3.24 yrs.

(b) 47.91 months, which is 3.99 yrs.

(c) 160.72 months, which is 13.39 yrs.

(d) 164.65 months, which is 13.72 yrs.

(e) None of the above.

Question 296  CFFA, interest tax shield

Which one of the following will decrease net income (NI) but increase cash flow from assets (CFFA) in this year for a tax-paying firm, all else remaining constant?

Remember:

###NI=(Rev-COGS-FC-Depr-IntExp).(1-t_c )### ###CFFA=NI+Depr-CapEx - ΔNWC+IntExp###

(a) An increase in revenue (##Rev##).

(b) An decrease in revenue (##Rev##).

(c) An increase in rent expense (part of fixed costs, ##FC##).

(d) An increase in interest expense (##IntExp##).

(e) An increase in dividends.

Question 365  DDM, stock pricing

Stocks in the United States usually pay quarterly dividends. For example, the software giant Microsoft paid a $0.23 dividend every quarter over the 2013 financial year and plans to pay a $0.28 dividend every quarter over the 2014 financial year.

Using the dividend discount model and net present value techniques, calculate the stock price of Microsoft assuming that:

• The time now is the beginning of July 2014. The next dividend of $0.28 will be received in 3 months (end of September 2014), with another 3 quarterly payments of $0.28 after this (end of December 2014, March 2015 and June 2015).
• The quarterly dividend will increase by 2.5% every year, but each quarterly dividend over the year will be equal. So each quarterly dividend paid in the financial year beginning in September 2015 will be $ 0.287 ##(=0.28×(1+0.025)^1)##, with the last at the end of June 2016. In the next financial year beginning in September 2016 each quarterly dividend will be $0.294175 ##(=0.28×(1+0.025)^2)##, with the last at the end of June 2017, and so on forever.
• The total required return on equity is 6% pa.
• The required return and growth rate are given as effective annual rates.
• Dividend payment dates and ex-dividend dates are at the same time.
• Remember that there are 4 quarters in a year and 3 months in a quarter.

What is the current stock price?

(a) $32.71126

(b) $32.298457

(c) $32

(d) $30.859679

(e) $8

Question 743  price gains and returns over time, no explanation

How many years will it take for an asset's price to triple (increase from say $1 to $3) if it grows by 5% pa?

(a) 17.7643 years

(b) 22.5171 years

(c) 29.2722 years

(d) 40 years

(e) 60 years

Question 921  utility, return distribution, log-normal distribution, arithmetic and geometric averages, no explanation

Who was the first theorist to propose the idea of ‘expected utility’?

(a) Daniel Bernoulli.

(b) John Larry Kelly Jr.

(c) Henry Allen Latane.

(d) Ole Peters.

(e) Paul Anthony Samuelson.

Question 981  margin loan, Basel accord, credit conversion factor

Margin loans secured by listed stock have a Basel III risk weight of 20%.

For margin loans that cannot be immediately cancelled by banks and asked to be repaid, the credit conversion factor (CCF) is 20%.

Suppose you have a stock portfolio worth $500,000, financed by:

• $300,000 of your own money; and
• $200,000 of the bank’s funds in the form of a margin loan which can only be cancelled by the bank after 5 days notice. The margin loan’s maximum LVR is 70%.

How much regulatory capital must the bank hold due to your margin loan? Assume that the bank wishes to pay dividends to its shareholders, so include the 2.5% capital conservation buffer in your calculations.

(a) $2100

(b) $4200

(c) $4800

(d) $5670

(e) $6300